Retailers' Sales Face the Abyss

Not long ago, Wall Street Greek warned investors to sell short the retail industry. You may not have noticed, as the call came out in the flurry of all the excitement about how great a holiday shopping season we had just concluded. Today, as the government reported the latest Retail Sales data for January, you may still have a chance to join the short side, with the SPDR S&P Retail ETF (NYSE: XRT) only down fractionally in morning trade Tuesday and still fattened 17.7% over the last 52-weeks by its superficial stride. Meanwhile, the SPDR Select Sector Fund - Consumer Discretionary ETF (NYSE: XLY) is up 9.5% over the last 52 weeks, both after adjustment for splits and dividends.

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Retailers' Sales Growth Slowing

The Census Bureau reported Retail Sales increased 0.4% on a seasonally adjusted basis in January, but that was short the economists’ consensus view for a 0.7% gain, based on Bloomberg’s tally. Meanwhile, the government revised December down to no change, cut from the previously noted inching upward by 0.1%. A glance at the top line data seems to show much of the weakness derived from the auto sector, as sales ex-auto improved 0.7%. That better level was superior to the consensus estimate for a 0.6% increase. However, ex-auto sales benefited from a downward adjustment to the December sales rate, which was dropped down to -0.5%, from the -0.2% previously noted. The shares of U.S. auto makers Ford (NYSE: F) and General Motors (NYSE: GM) are off on this news, down 0.7% and 1.2%, respectively in early trade Tuesday.

With the latest pressure applied by rising gasoline prices, many will be interested in the trend ex-gasoline and autos. On this line, sales improved 0.6%, and the December rate was also ratcheted higher to +0.6% from no change previously reported. With regard to rising gasoline prices, we do better to realize that this factor contributes to all consumer spending sooner or later. Thus, if we focus on the current satisfactory figure, we ignore an inevitable decline in spending that will more closely match with stock market performance moving forward. As pressure continues on tension tied to escalating Iranian event risk, gasoline prices should keep their support. It’s one of the reasons the west has shied away from attacking Iran in the first place, given the economic vulnerabilities of North America and Europe. Gasoline prices impact the savings and spending of most Americans, especially those who spend the most, the employed. Furthermore, this factor will certainly impact the spending of the under-employed hanging on the fringe of solvency.

While the retail sales pace seems to be slipping, optimists will note that the pace of retail sales was still up 5.8% from January 2011. Excluding autos, the year-over-year sales pace improved 5.5, but take note that gasoline station sales were up 7.4% on significantly higher gas prices. This fact seems to help nobody, given the shares of The Pantry (Nasdaq: PTRY) are off 23% over the trailing 52 week period.

Sales at Building Materials & Garden Equipment and Supplies Dealers were up 8.1%, but before celebrating a housing revival, realize that prices are up on these commodities as well. Still, this may help to explain the 26% 52-week share gain of Home Depot (NYSE: HD).

Food Services and Drinking Places saw an 8.2% year-to-year gain, and this sector is certainly a destination of consumer discretionary funds. Yet, a sampling of several restaurant stocks shows a wide variety for the palate. Darden Restaurants (NYSE: DRI) shares are up approximately 3.2% over the last 52-weeks through February 13, adjusting for dividends and splits. Meanwhile, the shares of Brinker International (NYSE: EAT) have done much better, rising 14.9%.

What concerns us today is the current trend, or rather, answering the question, “Is consumer spending slowing.” The answer is not so clearly discovered, considering the ongoing shift to discount and online retailers, which offer an economically strapped nation a better option. General Merchandise Stores saw sales gain 2.0% in January, but Department Stores marked only a 1.0% increase. Clothing Stores marked no change in January, while Electronics & Appliance Stores marked a 0.5% increase, thanks no doubt to innovation in the space and the drive of Apple (Nasdaq: AAPL), Amazon.com (Nasdaq: AMZN) and others. Non-store Retailers, or the catalog and internet salesmen, saw a 1.1% sales decline in January, but I suspect inadequate seasonal adjustment here, given the holiday push and market share gains.

There is no doubt that an innovative retail sector squeezed all it could from the American consumer this past shopping season, but I suspect consumers remain on suicide watch. Thus, I see this latest trend of slowing retail sales continuing to slug along given the weight of old pains like stubborn unemployment and dragging domestic confidence, and new stresses like that I see from an Iran event. Therefore, I reiterate my late 2011 suggestion that investors short the retail sector, as this latest economic data is only supportive of my economic argument. The Ugly Economic Secret is indeed out.

Article interests investors in: S&P Retail ETF (NYSE: XRT), Wal-Mart (NYSE: WMT), Pier 1 Imports (NYSE: PIR), Ethan Allen (NYSE: ETH), Hooker Furniture (Nasdaq: HOFT), Home Depot (NYSE: HD), Lowes (NYSE: LOW), Apple (Nasdaq: AAPL), Best Buy (NYSE: BBY), The Limited (NYSE: LTD), Chicos (NYSE: CHS), Ann Taylor (NYSE: ANN), The Gap (NYSE: GPS), Macy’s (NYSE: M), JC Penney (NYSE: JCP), Nordstrom (NYSE: JWN), TJX Company (NYSE: TJX), Kohls (NYSE: KSS), Costco (Nasdaq: COST), Target (NYSE: TGT), Wet Seal (Nasdaq: WTSLA), Hot Topic (Nasdaq: HOTT), American Eagle Outfitters (NYSE: AEO), Aeropostale (NYSE: ARO), Abercrombie & Fitch (NYSE: ANF), Saks (NYSE: SAK), Tiffany (NYSE: TIF), Talbots (NYSE: TLB), Lumber Liquidators (NYSE: LL), Builders Firstsource (Nasdaq: BLDR), Fortune Brands (NYSE: FO), Leggett & Platt (NYSE: LEG), Tempur-Pedic International (NYSE: TPX), Acuity Brands (NYSE: AYI), La-Z-Boy (NYSE: LZB), Select Comfort (Nasdaq: SCSS), Sleepy’s (NYSE: ZZ), Furniture Brands (NYSE: FBN), Natuzzi (NYSE: NTZ), Sears (Nasdaq: SHLD), Dillard’s (NYSE: DDS), Bon-Ton (Nasdaq: BONT), Cost Plus (Nasdaq: CPWM), Baker’s Footwear (Nasdaq: BKRS.OB), Bebe Stores (Nasdaq: BEBE), The Buckle (NYSE: BKE), Cache (Nasdaq: CACH), Casual Male (Nasdaq: CMRG), Cato (Nasdaq: CATO), Christopher & Banks (NYSE: CBK), Citi Trends (Nasdaq: CTRN), Collective Brands (NYSE: PSS), Destination Maternity (Nasdaq: DEST), Dress Barn (Nasdaq: DBRN), DSW (NYSE: DSW), Finish Line (Nasdaq: FINL), Footlocker (NYSE: FL), Gymboree (Nasdaq: GYMB), Guess (NYSE: GES), J. Crew (NYSE: JCG), Jones New York (NYSE: JNY), Jos. A Banks (Nasdaq: JOSB), New York & Co. (NYSE: NWY), Men’s Wearhouse (NYSE: MW), Syms (Nasdaq: SYMS), The Children’s Place (Nasdaq: PLCE).

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