We’ve all heard about how the U.S. consumers saved the economy in Q3, but if you dig deeper into the statistics, you will realize that the majority of this “strong” consumer spending is coming from a decrease in the savings rate to barely above 3%. Personal income minus government transfer in the same period has again decreased. Just how much can consumers keep spending their shrinking pool of paychecks and savings? Not much longer. The massive crowd you see on Black Friday is not a sign of healthy consumer spending. It’s a sign that people are desperate to get the cheapest deals. According to one survey, 40% of consumers are done with their holiday shopping versus 28% a year ago. Once Wall Street realizes this, the retail stocks will get crushed. One way to profit from this is to short high-end retailers.
Tiffany (NYSE:TIF) – Tiffany & Co designs and sells fine jewelry worldwide. It derives slightly less than half of its revenue from the US. In the latest quarter, the company reported strong earnings, but it surprised the Street with a weak guidance that has pressured the stock since. Over 50% of Tiffany’s net earnings come from wedding-related jewelry, which has notoriously elastic demand. When people start to save more, they will definitely pull back on wedding-related expenses next year. This is something that hasn’t been priced into the stock as analysts so far are focused on the company's emerging market growth. With the developing world slowing down as well, it’s hard to imagine that Tiffany & Co can maintain the same level of growth.
Abercrombie (NYSE:ANF) – I have mentioned Abercrombie before here. The stock has pulled back nearly 20% since my article and I believe there is further room to fall. In the November Personal Expenditure report, restaurant sales declined 0.3%, the first decline in 6 months. Restaurant sales are a leading indicator of the economy and closely correlated with clothing purchases. If people are not going out to eat, why would they be spending money on expensive clothes? Abercrombie was hurt last quarter by weak guidance, and I believe there are more guidance cuts to come. The stock could soon be trading in the 30s.
Best Buy (NYSE:BBY) – Best Buy is the premier American electronics retailer, but with people starting to buy more things online to save money, it is in a vulnerable position. The company’s net income fell 29% while revenue rose 2% in the latest quarter as intense price competition ate into its margin. Best Buy is moving more products off its shelves, but at much lower price and potentially losing money on some of the items. The last quarter ended on November 26, which included the Black Friday results. If nearly half of all consumers are done shopping, how will Best Buy make its sales in December? It can only offer bigger discounts, which will eat into its margin and net income even more.
Amazon (NASDAQ:AMZN) – I wrote about Amazon in my last article to analyze the earning potential of the Kindle Fire. My conclusion was that the earnings impact would be minimal as the company is losing money on each unit sold and the content sales will fall significantly short of expectation. With that said, the company still has a strong retail base and a big attraction of Amazon is its retail tax-free policy, but the valuation is simply too rich. It’s trading at 94x PE with a market capitalization of $90 billion, which is twice of that of Target (NYSE:TGT). The company is trading as expensive as Facebook with similar lofty valuations. Do you think Amazon’s earning will take off like Facebook’s? I doubt it.
Last quarter’s consumer spending was no doubt strong, but the key take away is that it’s not sustainable. All of the retailers mentioned above except Best Buy are trading at nearly all-time highs. Given the condition of the consumer, I don’t believe these companies’ current valuations or “rosy” prospects are sustainable. Once the evidence of consumer pullback becomes evident, these stocks will drop accordingly.