Don't Count Retail Out Yet!
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Research firms that track retail sales have started to dump disappointing news on the sector. At least two didn’t wait for Christmas day to come to an end before announcing that December 2012 sales were bad – really bad – worse even than they were during the 2008 financial crisis.
If you consider the lackluster sales results that have trickled in so far as an indication that public companies in the space are faring horridly, I caution you by using the famed line, “It ain’t over until the fat lady sings.”
There are a few reasons for my optimism, but before I detail them, I’ll note some of the numbers that had been released as of Wednesday's closing bell when I completed this story. The International Council of Shopping Centers said retail sales for the week ended Dec. 22 were up just 0.7%. MasterCard’s Spending Pulse unit found that for the eight weeks from Oct. 28 through Christmas Eve, retail sales for the holidays rose just 0.7% from the year before.
These initial readings show holiday sales growth barely budged largely due to Super Storm Sandy and fiscal cliff concerns. I came across the following data from Bloomberg that highlights the financial impact the storm played on holiday sales by region. In the Northeast, sales were contracted by 1.4%. In the mid-Atlantic region, they were contracted by 3.9%. Only the South and West experienced a growth in sales. It was between 2% and 4% in both regions.
Luxury retailers are part of the reason for the decline because they make up an important segment of the retail sector. To get an idea of their impact, consider this. The mid-Atlantic and Northeast regions account for 24% of national retail sales. Within that group is luxury retail, which accounts for about 20% of sales in the New York area, which is experiencing a double whammy from the storm and fiscal cliff concerns. So, you can see how any slip in their sales can have a domino effect on the entire sector.
Coach (NYSE: COH), as an example of luxury retailers, had traded as high as about $80 in the spring. On Christmas Eve, prior to the release of the dismal holiday sales figures on Wednesday, it was trading around $58. By the closing bell, it was down 5.91% to $54.12.
Michael Kors (NYSE: KORS) marched from trading around $26 at the beginning of the year to a 52-week high of $58.62. It closed down 6.66% to $50.
As the deadline for the fiscal cliff negotiations nears, we’re seeing that consumers of lower income levels are also holding their purse strings tight. Earlier this month, Wal-Mart (NYSE: WMT) CEO Mike Duke said that the number of the company’s core shoppers understanding the crisis over spending cuts and tax hikes has increased since the November presidential election. He says that one week after the election, 75% of its shoppers understood what the phrase fiscal cliff meant. While Wal-Mart was down, it didn't lose as significantly as the luxury retailers. It closed at $67.97, which was a mere .88%.
Now to my reasoning behind not being ready to throw in the towel based on this sector’s holiday sales yet. We still have millions of shoppers who will be crowding stores to buy items using the gift cards they received as holiday presents though the end of the month. Data shows that they often spend more than the face value on these cards. Also, retailers may not make deep cuts in the prices of their merchandise yet, which could impact their earnings. This is especially the case for clothing retailers that have until February to clear shelves to make room for spring fashions. Also, retailers should benefit from an extra week of holiday shopping in December.
Retail shoppers had seemed unnerved about the economy and the impasse between President Obama and Congress over resolving their fiscal cliff differences. That could be seen with the S&P retail index, which hit an historic high on Dec. 3, and since then it has only been down about 3%. This is a sign that the sector will end the year with moderate gains.
Whether or not these mitigating factors will be enough to lead to the estimated 3% to 4% sales growth that had been anticipated by the National Retail Federation remains to be seen. However, I would continue to be long in those that have been up so far this year.
Consider these retailers as long-term buys (year-to-date percentage growth gains)
Gap (NYSE: GPS): up 69%
TJX Companies (NYSE: TJX): up 31%
Macy’s (NYSE: M): up 17%
Target (NYSE: TGT): up 16%
Ross Stores (NASDAQ: ROST): up 13%
Nike (NYSE: NKE): up 9%.
TwillyD has no positions in the stocks mentioned above. The Motley Fool owns shares of Coach and Nike. Motley Fool newsletter services recommend Coach and Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!