Back to School Poor & Incognito

By The Greek:

August's Retail Sales Report offered a surprising decline of 0.3%. The month typically serves as the "back to school" loading period, and is usually a hot time for retail. Thus, we had to wonder, have children returned to school without new lunchboxes and crayons?

The most embarrassing thing that could probably happen to a toddler in elementary school, besides peeing himself in class, is greeting his old classmates and friends from the 1st grade without new gear. Can you imagine the shame born by poverty stricken kindergartners when they arrive to their new class and grade level toting an out of vogue lunchbox. Meanwhile, all your pals have the newest Batman box... Oh, the shame. A kid might have to go to school incognito in that case, and last year's pen doesn't even do a good job at that. Thanks a lot mom!

August Retail Sales

As usual, the headline news offers far from clear insight into the message of the report. While overall sales declined versus July levels, there was a taint to the message that we want to clarify for you here.

While "back to school" season was without a doubt tough, it most certainly was not the only factor behind retail sales decline in August. The key factor in this poor showing was energy. With oil's decline last month, a critical retail driver was sharply weakened, that being gasoline prices. Gasoline station sales comprise a large component of the retail figure, so changes in gasoline prices go a long way in driving this data point. While gasoline station sales were up 22.5% from the prior year period, they were down 2.5% from July. Because this component is mathematically important, even that small a change plays a key role in the report.

What About "Back to School" Then

Well, actually, many of the retail chain stocks that are in decline today have real good reason for it. At the midpoint of trading on Friday, Macy's (NYSE: M), JC Penney (NYSE: JCP), Kohl's (NYSE: KSS) and Nordstrom (NYSE: JWN) were all down between 3% to 6%. The Retail Trade Report might have been tainted by gasoline prices, but it was far from spectacular for retail nonetheless. Once again, Wall Street Greek got it right too. We've been chatting a little lately about the retail sector, and in our article, "Bail Out Buzz Wears Thin," we noted:

"Remember, we're looking for weekly sales to lose steam now that "back to school" shopping is fizzling and stimulus checks are only a distant memory. We've a barren wasteland to traverse until we reach Christmas now, so retail data should become sickly. The same goes for the news flow out of retail companies, but there are macro drivers working in favor of damaged shares overall, and we'll be going over these in the near future in another article. Retail is not damaged goods anymore, as evidenced by the rise of the sector over the last three months at least. There's room to give back some profits as we journey through the dead zone until Thanksgiving."

Even we did not expect August to prove weaker than July though. According to the data, department store sales fell 1.5%; general merchandise proprietors sales fell 0.2%; clothing and clothing accessories stores sales fell 1.3%; and miscellaneous stores sales fell 1.3%. Even non-store retailers, so those selling goods via catalog, Internet and perhaps traveling caravan, saw sales decline 2.3% in August. Only sporting goods, hobby, book and music stores, which in many instances clearly benefit from back to school needs, experienced a sales increase of 0.5%.

When August's sales shoot short of July's, that portends trouble for the critical holiday shopping season. Also, before we get to Black Friday, which might be renamed "Pitch Black Friday" this year, we've got three months of barren shopping wasteland to traverse. As unemployment increases, there should be little fundamental reason for retail shares to rise. However, toward the end of October, many poor performing stocks should see benefit. We'll talk about why in a future article. As for little Jimmy, seen in the image above, he's probably going to have to stay undercover through the holidays.

Please see our disclosure at the Wall Street Greek website. Article interests AMEX: DIA, AMEX: SPY, AMEX: SDS, AMEX: DOG, AMEX: QLD, Nasdaq: QQQQ, NYSE: NYX.