Holiday Retail Sales
I just wanted to take a few minutes and jot down some comments before I head out for the day. It seems many are finally realizing retailers are going to have a very weak holiday season. Waiting to see the "white of your eyes" fundamentals would have been very painful for investors owning retail stocks. Most retail stocks have fallen off of a cliff. Some down 50% or more in a matter of months. That includes companies like JC Penney, Starbucks and Bed, Bath & Beyond with skilled teams and great management.
Retail discounts are very heavy and were very early this season. This means many retailers are more interested in moving out excess inventory, a profit killer, than making their Christmas profit objectives. It also likely means sales have fallen off of a cliff without heavy discounting. So, I am very dubious of any comments about sales. Even if sales over the weekend turn out to be decent, they will be highly discounted sales and likely well short of expectations if one includes sales leading up to this long weekend. If retailers have a serious inventory problem and have misread demand, post December sales are going to be at discount levels we probably haven't seen in decades. Oh, and don't be fooled by the lines waiting to get into stores we see on television news clips. Those people are lined up for early bird specials which is heavily discounted loss leaders in limited supply. Marketers then hope those same shoppers will impulsively spend on higher profit items once in the store. Don't bet on it without heavy discounting. Consumers are less likely to mortgage their future than banks have this cycle. Banks are making said mistakes with other people's money. It's always fun when you are making money--banks--by risking other people's money. Not so fun when it's your own money.
Many retail stocks are still extremely overvalued both fundamentally and with respect to future earnings. In a bizarre set of circumstances, many retailers considered defensive investments are more expensive than growth retailers. Frankly, much of the best value in retail investments is now in the areas perceived to have the highest risks. It's just amazing how incredibly inept investors seem to have become. We have an environment of locusts roaming from one investment to another without any concern or understanding of fundamentals. This is a sign of excess market liquidity that will eventually go to money heaven along with the overabundance of hedge funds causing this phenomenon.
Wal-mart's recent strength and reasonable earnings outlook is held as a beacon of hope for many. Well, that is simply misreading the tea leaves. Wal-mart's earnings are steady because they have drastically cut back on growth and spending. That might be a temporary stopgap for earnings but I view this as one of many signs of deteriorating long term fundamentals for the company. I am very bearish on Wal-mart long term. I would not be surprised to see the company lose at least 50% of its value from here. New store openings are being slowed and capital spending is being slashed in an attempt to prop up earnings. That means less real estate transactions, less engineering, less construction, less fabrication for store fixtures, less energy demand for utilities, less taxes for local governments, less jobs, less software, less consulting, less diesel generators for stores, less demand for finished goods and less, less and more less. How is this good for the economy? Oh, and as we discussed before, this is not limited to Wal-mart. Many retailers are slashing their spending.
A quick check of some compadres in the capital goods space have yielded a picture that Wal-mart has kiboshed some major spending projects. One person has told me a major project accounting for 6% of this company's annual revenue was just cut from the Wal-mart budget. That means discretionary capital equipment spending at Wal-mart is likely nonexistent except for very high return on investment projects that have very low risk.
Finally, a comment about the weekend travel. While this might seem anecdotal at best, traffic on the highways was down to nearly nothing in my travels. And I do mean nothing. That compares to years past when Thanksgiving traffic was so heavy that delays and traffic jams on the same highway were commonplace. I have never seen anything like it. Additionally, a major truck stop I pass is typically packed on Thanksgiving with truckers. This year the truck lot was 75% empty.
Very negative sentiment after seeing the biggest global boom in history is not a gift from the gods as many would have one believe. It is a vote of no confidence and a potentially ominous sign to batten down the hatches.
Retail discounts are very heavy and were very early this season. This means many retailers are more interested in moving out excess inventory, a profit killer, than making their Christmas profit objectives. It also likely means sales have fallen off of a cliff without heavy discounting. So, I am very dubious of any comments about sales. Even if sales over the weekend turn out to be decent, they will be highly discounted sales and likely well short of expectations if one includes sales leading up to this long weekend. If retailers have a serious inventory problem and have misread demand, post December sales are going to be at discount levels we probably haven't seen in decades. Oh, and don't be fooled by the lines waiting to get into stores we see on television news clips. Those people are lined up for early bird specials which is heavily discounted loss leaders in limited supply. Marketers then hope those same shoppers will impulsively spend on higher profit items once in the store. Don't bet on it without heavy discounting. Consumers are less likely to mortgage their future than banks have this cycle. Banks are making said mistakes with other people's money. It's always fun when you are making money--banks--by risking other people's money. Not so fun when it's your own money.
Many retail stocks are still extremely overvalued both fundamentally and with respect to future earnings. In a bizarre set of circumstances, many retailers considered defensive investments are more expensive than growth retailers. Frankly, much of the best value in retail investments is now in the areas perceived to have the highest risks. It's just amazing how incredibly inept investors seem to have become. We have an environment of locusts roaming from one investment to another without any concern or understanding of fundamentals. This is a sign of excess market liquidity that will eventually go to money heaven along with the overabundance of hedge funds causing this phenomenon.
Wal-mart's recent strength and reasonable earnings outlook is held as a beacon of hope for many. Well, that is simply misreading the tea leaves. Wal-mart's earnings are steady because they have drastically cut back on growth and spending. That might be a temporary stopgap for earnings but I view this as one of many signs of deteriorating long term fundamentals for the company. I am very bearish on Wal-mart long term. I would not be surprised to see the company lose at least 50% of its value from here. New store openings are being slowed and capital spending is being slashed in an attempt to prop up earnings. That means less real estate transactions, less engineering, less construction, less fabrication for store fixtures, less energy demand for utilities, less taxes for local governments, less jobs, less software, less consulting, less diesel generators for stores, less demand for finished goods and less, less and more less. How is this good for the economy? Oh, and as we discussed before, this is not limited to Wal-mart. Many retailers are slashing their spending.
A quick check of some compadres in the capital goods space have yielded a picture that Wal-mart has kiboshed some major spending projects. One person has told me a major project accounting for 6% of this company's annual revenue was just cut from the Wal-mart budget. That means discretionary capital equipment spending at Wal-mart is likely nonexistent except for very high return on investment projects that have very low risk.
Finally, a comment about the weekend travel. While this might seem anecdotal at best, traffic on the highways was down to nearly nothing in my travels. And I do mean nothing. That compares to years past when Thanksgiving traffic was so heavy that delays and traffic jams on the same highway were commonplace. I have never seen anything like it. Additionally, a major truck stop I pass is typically packed on Thanksgiving with truckers. This year the truck lot was 75% empty.
Very negative sentiment after seeing the biggest global boom in history is not a gift from the gods as many would have one believe. It is a vote of no confidence and a potentially ominous sign to batten down the hatches.
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