Stay Away From Retailers and Restaurants

January 10, 2008

As we start off the year, the market has taken a tumble and continuous talk of recession has spooked investors into beating down the Dow toward 12,500. If you’re bargain hunting, make sure to bargain hunt away from the retail or restaurant sector. Even if we aren’t in an official recession, we are definitely in a slowing economy. The first causalities will be retailers and restaurants since people will realize that they will need to cut down their materialistic purchases and amount of times they eat out in a given month.

On late Thursday, the retail sector reported weak December earnings. The holidays of 2007 marked the slowest holiday retail season since 2002 and many retailers failed to meet lowered earning expectations. With the down housing market poised to last longer than previously expected and a bottom nowhere in sight, retailers will have to go above and beyond to lure customers into their stores.

Ann Taylor (ANN), Macy’s (M), Limited Brands (LTD), Abercrombie (ANF), PF Changs (PFCB), Red Robin Gourmet Burgers (RRGB), Jamba Juice (JMBA), Target (TGT), Talbots (TLB), and many others better get ready for a rough first half of 2008. In the business world, the customer comes first so you better satisfy the customer or they’ll stay home. In previous entries, I advised to stay away from airlines and to stay away from homebuilders. I was very on target with both of those sectors and I foresee it being very tough until at least the start of summer for this sector. Why mess with retail when you have plenty of good options in technology, casinos, and energy?

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Retail Slowdown Not a Myth

December 17, 2007

There has been continued talk of a slowdown in consumer spending due to the spiraling housing prices and its effect on an overall US economic slowdown. Whether it means going to the mall or through online purchases, consumers will not be spending as much in 2008. If existing house prices are poised to drop 4.5% next year, then the average household net worth will be decreasing around $11,000-$32,000 depending on where you live in the US. With that kind of decrease (and it could be worse), people will be forced to cut their spending and the retail sector will be the first casualty.

When I was shopping at Horton Plaza yesterday in downtown San Diego, I went to buy something cheap at Longs Drugs to get my parking validated for three hours of free parking. After getting to the register, I was told that businesses no longer validate parking anymore since there are now kiosks in the mall that will allow anybody to validate parking for free. Therefore, shoppers do not have to spend a cent to get three free hours of parking. Upon further investigation, I found out that Horton Plaza was doing this in order to allow people to “window shop” without any ramifications of having to pay exorbitant parking prices. While I was pleasantly surprised to get three free hours of parking, I also realized:

a) consumer spending must really be slowing to a halt for this five-level shopping mall to give away parking to attract customers

b) the housing bubble seems to be affecting traffic at the local malls

c) coupled with higher gas prices, people are either deciding to shop more online or just stay home and not spend in general

The market has surely priced a lot of bad news into retail stocks within the last year. Many of them stand at yearly lows or far from their earlier peaks. I would wait for the holiday season to pass and get a clearer picture on the health of the retail sector and buy once prices to depress another 10%.
Some beaten down retailers include:

Company Current Price Yearly High
American Eagle (AEO) 20.27 34.80
Limited Brands (LTD) 18.69 31.30
Pacific Sunwear (PSUN) 14.44 23.11
Lowe’s Companies (LOW) 22.72 35.74
JC Penney (JCP) 42.52 87.18
Home Depot (HD) 26.63 42.01
Dillard’s (DDS) 19.53 40.56