Retail Sector

The U.S. retail sector is that segment of the U.S. economy related to consumer purchases at the retail level. In the simplest form, the retail sector consists of Americans buying goods and services at retail establishments…stores. The retail sector accounts for about 10% of U.S. gross domestic product (GDP).

Don’t Be Fooled by the Retail Numbers—Just Be Selective

By George Leong for Investment Contrarians | Apr 16, 2013

Don’t Be Fooled by the Retail Numbers When interest rates are as low as they are and consumers begin to hold back on their spending, you have to wonder about the prospects for the retail sector going forward.

With the higher taxes on those earning over $400,000 and other tax increases as a result of the sequestration, we may be seeing some evidence of reduced spending.

The U.S. Department of Commerce said retail sales in March contracted by 0.4% on both a headline and an ex-auto basis, which was below the Briefing.com estimates of flat sales and 0.3%, respectively. This was the second decline in retail sales in the last three months.

While it may be premature to assume a new downtrend for retail sales, I wonder if the decline in take-home pay for some Americans has resulted in less consumer spending.

Or, it may be the softness of the jobs market that is making consumers nervous. With only 88,000 new jobs created in March, the jobs numbers must have had some impact on consumers and the retail sector.

Even consumer sentiment appears to be fading a bit as evidenced by the Thomson Reuters/University of Michigan Consumer Sentiment Index reading of 72.3 in April. This reading represented the worst reading since July 2012, and it’s well below the 76.0 estimate by Briefing.com and the 78.6 reading in February.

According to my estimate, the retail sector continues to be full of opportunities, but you also need to be careful on what retail stocks you buy.

You would have been sideswiped if you bought J. C. Penney Company, Inc. (NYSE/JCP), as the company posted horrible results and subsequently fired … Read More

Dow at Record Highs, but U.S. Economy Continues to Worsen

By George Leong for Investment Contrarians | Mar 12, 2013

U.S. Economy Continues to Worsen The Dow Jones Industrial Average is firing on all cylinders, trading at a record high. The S&P 500 is also close to its all-time record. Technology and small-cap stocks are blazing along. The amount of new stock market wealth created in the first week of March and in 2013 has been great. Add in the better-than-expected jobs numbers and a decline in the unemployment rate to 7.7%, and you would think that the U.S. economy is back, loaded and ready to go. But we may be closer to a financial crisis than most think.

Here’s the problem: the creation of stock market wealth is heavily weighted with the institutional money and the top one to five percent of the wealthiest Americans. (I use the wider range of the top earners, since you have to be doing fairly well to be in this group.)

There’s an old saying—“Money makes money.” But let me put it another way: making money on $1.0 million is a lot easier than making money on $1,000. Earn two percent on $1.0 million, and you’d have an extra $20,000. Make two percent on $1,000, and you only have $20.00, just enough for a dinner for two at McDonald’s Corporation (NYSE/MCD). All I’m saying is don’t be fooled by the new headlines talking about how well America is doing, as a financial crisis is still possible.

The housing market is booming, but we all know that the rally in prices is partially due to rich investors and institutions buying cheap properties from those who had to sell or be foreclosed on due to a lack of funds to … Read More

To the Rich: The Luxury Retailers Need You

By George Leong for Investment Contrarians | Jan 25, 2013

The shares of luxury stock Coach, Inc. (NYSE/COH) plummeted by more than 14.0% last Wednesday. The stock is down 35.0% from its 52-week high, as the retailer of high-end designer handbags and accessories is struggling to achieve the sales growth that helped to drive the stock from the $2.00 level in 2000. Revenue growth in the second quarter was a muted 3.8%.

In the high-end retail sector, Coach is facing some spending slowing at its factory stores; if not for its strong sales of 40.0% year-over-year in China, the growth would be lower, according to the company. Same-store sales from China grew at double digits, while they declined 2.2% in North America. The growing importance of Asia is critical, since Coach owns and operates 402 stores in Asia. (Source: “Coach Reports Second Quarter Earnings Per Share of $1.23,” Business Wire, January 23, 2013.)

The showing from Coach indicates the current stalling in the luxury brand stocks in the retail sector, with the higher-end consumers appearing to be cutting back on spending.

Chart courtesy of www.StockCharts.com

The retail sector continues to be a difficult place to make money, and it requires careful attention and monitoring. There are trades to be made, but you need to be selective.

Discount and big-box stores continue to do very well, and in my view, they continue to be the space in the retail sector to make money.

The successful initial public offerings (IPOs) of Five Below, Inc. (NASDAQ/FIVE) in mid-July demonstrated the continued strong appetite for discount retail stocks.

Luxury retail stocks had been on a tear in 2011, but they have lost some luster … Read More

You Need to Stick with the Cheap Retailers

By George Leong for Investment Contrarians | Jan 18, 2013

Stick with the Cheap Retailers The retail sector continues to show decent growth, which is encouraging given the lack of strong jobs growth. The improvement in the housing market is helping to add some confidence to consumer spending and the retail sector. Retail sales in December grew 0.5%, above the 0.4% estimate made by Briefing.com. On an ex-auto basis, sales grew at 0.3%, which was the same as November, but below the Briefing.com estimate of 0.5%.

Retail sales in December, comprising 22 retailers polled by the Thomson Reuters Same-Store Sales Index, increased a slightly better-than-expected 3.4% versus the estimate of 3.3%. (Source: Wahba, P. and Skariachan, D., “December retail sales up, but discounts hurt profits,” Reuters, January 5, 2012.)

The results in the retail sector are decent but not stellar, as there’s still a hesitancy to spend, at least at non-discounted prices.

lululemon athletica inc. (NASDAQ/LULU) fell nearly four percent on January 10 after the fashionable maker of athletic clothing made a downward revision in its sales guidance.

Discounter Target Corporation (NYSE/TGT) reported flat sales in December, which is a disappointment, given the hope placed on the holiday shopping season, when some retailers can generate up to 40% of total annual sales.

I believe the department stores and some of the specialty retailers will fare well. The key to success in the retail sector is selective picking. I would stay away from J. C. Penney Company, Inc. (NYSE/JCP) as the company tries to restructure out of its mess.

My advice is to continue to stick with the leading discount bellwether retail stocks. In the large-cap retail sector area, the top companies are Wal-Mart Stores, Inc. … Read More

Why the Fiscal Cliff Is Impacting Consumer Spending

By George Leong for Investment Contrarians | Dec 17, 2012

Fiscal Cliff Is Impacting Consumer Spending The fiscal cliff is causing a drag on the economy and, in particular, consumers’ desire to spend, due to the uncertainty of how the budgetary cuts and tax increases will impact income. If the fiscal cliff is allowed to proceed—and it will to some degree—the reality is that taxes will rise. I’m not sure if the middle class and those who earn less than $250,000 will be spared, but I do feel there will be a compromise made on the income tax increases.

In the meantime, consumers are likely to be hesitant to spend in the retail sector. The headline retail sales reading rose 0.3% in November, which was below the Briefing.com 0.6% estimate but up from -0.3% in October. The ex-auto reading was flat, lower than the Briefing.com 0.2% estimate. While the November numbers don’t translate into December, I’m sensing the uncertainty of the fiscal cliff will impact consumer spending in this key shopping season for the retail sector.

We are heading into the heart of the holiday shopping season. I’m sure the retail sector is anxiously praying for consumers to spend. A strong shopping season in the retail sector will also go a long way to helping the economic recovery, while also giving the stock market good news.

The two recent jobs reports added some optimism to the retail sector; albeit, I doubt it will be enough to drive consumers to the malls and online to spend. We need to see progressive and stronger job creation going forward to instill some confidence in shoppers. In the best-case scenario, if job creation rises, this would likely translate into higher … Read More