19 September 2005

Behold! My Discount Shopping Thesis

$100 oil! Category 5 hurricanes! Alan Greenspan’s itchy trigger finger! Dust bunnies and nothing else in Americans' wallets! Human sacrifice, dogs and cats living together - mass hysteria!

Hyperbole and histrionics aside, I had a thought, a stock-buying thesis, if we’re going to get all highfalutin’. Discounters and chain stores that offer more consumer value will do better in a tighter economy than mid-level and high-end stores, right?

Wall Street responded to the August retail sales report negatively. Cramer pooh-poohs the retail sector on a nightly basis. Katrina and high oil costs should affect our GDP and economy, but shouldn't stores with lower price points prosper from the tightening of America's wallets? People will shop at Wal-Mart and Target to save pennies on the necessities. That's thestreet.com’s Stocks Under Ten guys' argument:

"Higher inflation could soon start taking a toll on the U.S. consumer, and that means high-end retailers such as Coach (COH) and Nordstrom (JWN) could see a chill in luxury sales.”

also sees problems with the retail sector and with the consumer:

The US Consumer is Broke, Time to Short Retail and Auto Stocks?
Barron's interviews (paid subscription required) two LA-based short
sellers, Lee Mikles and Mark Miller, partners in (guess what)
Mikles/Miller Management. Their viewpoint:

the consumer is broke and he doesn't know it yet. But he is about to find out. All the buckets that propelled consumer spending are empty
now, whether it is the increase in mortgage debt, the increase in
consumer debt or the reduction in the savings rate. No one statistic
will tip the scale at the end of the day. But one very obvious and
very curious statistic is that we have dipped into a negative savings
rate for the first time. That is not only unsustainable, it is
sustainable only for a few months. That's important to note because it
tells you consumers are borrowing money to make debt payments. The
U.S. consumer has become payment driven. He is driven not by the
aggregate amount of debt he possesses but by the amount of the
payment. And now the consumer has not only taken his savings rate to
nothing, it has turned negative.

Or is this all a bunch of alarmist bullshit?

Perhaps the bad news is a bit overblown, as U.S. News thinks:

So what's the real story with retail sales? Excluding sales of cars,
food, and gasoline, they were up 0.5 percent in August and were
unchanged in July. The trend suggests that retail sales are slowing
slightly but still OK
, according to Ian Shepherdson of High Frequency

Though sales in several categories rose in August, including
electronics, appliances, furniture, and health- and personal-care
items, high gas prices should continue to slow retail sales of all
items over the next few months.

Here's some more piling on of the wishy-washy-sorta-negative consensus: “Higher fuel costs and job losses after Hurricane Katrina may sap spending in coming months, economists said.”

Now for the horrendous news, the American consumer is feeling a bit like a pimply-faced wallflower in this Reuters report from 9/16:

Consumer Sentiment Index Drops Sharply

CHICAGO (Reuters) - U.S. consumer confidence plummeted to a 13-year low in early September, battered by record high gasoline prices and the full force of Hurricane Katrina, a report showed on Friday.
The University of Michigan’s closely-watched consumer sentiment index fell to 76.9 in September from 89.1 in August, far below Wall Street forecasts and the 81.8 hit after the September 11, 2001, attacks on New York and Washington.

The current conditions dropped to the lowest level since December 2003 while the expectations index plummeted to the lowest since February 1992.

Of course, Wal-Mart is right on top of this crisis of confidence:
``Where you have your slowness is in the things that people don't have
to have,'' Wal-Mart Chief Executive H. Lee Scott said at a meeting
with analysts in Boston on Sept. 7. ``With higher fuel prices, we are
seeing an increasing difference between the first of the month and the
end of the month,'' with spending winding down as the month goes

Okay, I think I've pummeled you with enough argument and evidence. The American consumer's billfold is light on the Jacksons but still bustling with Washingtons. There's money to spend after filling the tank, but not quite as much.

So, will discount retailer stocks soon be as cheap as their inventory? Will Wall Street price down retail stocks in the coming months, expecting the lack of consumer confidence to hinder earnings?

Over the next few posts, I am going to examine various retail stocks using this thesis as background. I hope to figure out if there are any buying opportunities in the near-term.

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