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Guaging the Consumer

|Includes:AEO, ARO, BJ, COH, COST, DLTR, FDO, FRED, JWN, M, PSUN, ROST, SKS, TGT, TIF, Wal-Mart Stores, Inc. (WMT), ZQK

If you have followed my writings as of late, it’s apparent that I view the rally in equities of retailers as suspect. Now, just because I sport a core thesis doesn’t mean I have not put out trading ideas on our services or recommended special situation choices for institutional clients. However, I am not seeing the “green shoots” from the retail sector to support higher estimates of intrinsic value across the board for specialty apparel or hardline goods companies. Once we move beyond the first half of 2009, the benefit to retail sector earnings from store closures and inventory adjustments will have faded from what we are about to see for 1Q and 2Q. At some juncture shortly, retailers will have to make an assumption about the future, a bet so to speak that demand will return either for back to school or the holidays. I do not have a crystal ball, but earnings expectations for holiday 2009 certainly look overstated. There is a sea change in how the consumer is spending, and will likely spend, in the foreseeable future. This is something I have brought to the surface for the better part of a year. Already, I am seeing analysts hedge their bets, saying that valuation has gotten out of hand for equities under coverage. Really, you don’t say. Just take a look at the direction of the U.S. savings rate via statistics from the BEA. The Retail Index (RLX) peaked in late 2007 just as the savings rate was approaching unsustainable, and dangerous lows. The savings rate has begun to pick up, and currently stands at 4.2%. I see this rate moving higher into 2010, perhaps touching the historical average of 8.0%.  What this essentially equates to is fewer dollars sloshing around the retail sector, and of course fewer winners. 

Pick and choose your spots from the sector. Valuation must be very inviting (deep discount to book value; Liz Claiborne recommendation also reflected my belief its specialty apparel business is worth considerably more than entire firm), cash flow positions strong, and zero to modest debt on the books. Retail is evolving, and those firms with the balance sheets to invest in the future are the ones that will win when that savings rate comes down (and it will).
I have been thinking more and more about the new era of retail, you know when the global economic zaniness subsides. If you would like some of my early views, feel free to shoot an email to

Authored by Brian S. Sozzi, an Equity Research Analyst for Wall Street Strategies, Inc. ( covering companies in the Retail (hardline and softline) sector.

Disclosure: None