Retailers Cautious About Holiday Shopping Season

Bad news continues to dog on-line bookseller Inc. (NASDAQ/AMZN). Facing rising marketing and operating costs, the top on-line bookstore is struggling with its operations. Last Tuesday, Amazon sent investors to the exits after reporting a weak outlook for its Q4, which includes the holiday shopping season. This may even reflect deeper concerns at Amazon. I was not impressed by the news, even though I don’t own shares of Amazon. earned Q3 profits of $0.10 a share — significantly lower than the previous year’s Q3 profits of $54 million, or $0.13 a share. The outlook for the key Q4 was also disappointing, with expected sales coming in between $2.86 billion and $3.16 billion. The midpoint of $3.01 billion falls short of the average $3.08 billion expected on the Street.

 The reality is that we may see sluggishness in the traditionally strong Q4 shopping season. Consumer confidence data are showing some fragility after falling below 100 to 86.6 in September, the lowest reading since an 81.1 reading in October 2003. With high oil prices and rising interest rates, debt levels are expanding, and they will continue to become more of a concern going forward. A good majority of people have fixed budgets, and higher financing costs will reduce money available for other purchases.

 Bellwether Wal-Mart Stores Inc. (NYSE/WMT), a good indicator of the retail sector, has already blamed high fuel costs for its sluggish sales, and it, too, has indicated cautiousness towards the holiday shopping season. Unless shoppers get some renewed enthusiasm to spend, it may be a tough Q4 coming up for retailers. I expect some heavy discounting to move inventory, which would be good for the consumer but can only mean pressure on operating margins.

 If you are currently holding some retail stocks, here is a strategy you may want to consider: Given the neutral sentiment towards retail stocks at this time, you could write some covered call options to generate some premium, thus reducing the overall average cost of the stock in question.

 If you are negative on the retail sector and want to short, I would suggest you reconsider, unless, of course, you have a stomach for risk. If you need to short, please place appropriate stop-buys on your short position or you could find yourself in hot water should the stock stage a strong rally. A better alternative to shorting would be to buy put options or initiate bearish put spreads.