Former Retail Superstar Struggling
in Weak Market

Former retail superstar Gap Inc. is now largely dead money for the time being, as the company works to try to turn its sinking ship around. George Leong discusses this and other retail sector news.Former retail superstar Gap Inc. (NYSE/GPS) is now largely dead money for the time being, as the company works to try to turn its sinking ship around.

The stock market has punished Gap for its results. The competition is extremely high in Gap’s space and the company is beginning to become a dinosaur as far as popularity among the youth, who no longer want to wear Gap apparel, but instead wearing trendier clothes from the likes of Aeropostale, Inc. (NYSE/ARO), American Eagle Outfitters Inc. (NYSE/AEO), and Hollister.

For the five-week period ended October 1, Gap reported more disappointing results after a four-percent decline in its key same-store sales. With the debt crisis in Europe and jobs at risk in the U.S., there has been a decline in consumer demand. But, for Gap, it has more to do with the company no longer appealing to the youth crowd than the debt crisis and other problems.

Now with the third-quarter earnings, watch the retailers closely, especially what they say about what to expect during the holiday shopping season that traditionally begins with Black Friday on November 25, the day following Thanksgiving.

Yet, in spite of weak consumer confidence, which came in at a disappointing 48.5 in September, consumers are continuing to spend, albeit at an anemic rate.

The headline Retail Sales for September saw a rise of 1.1%, better than the 0.6% estimate, while the core number excluding autos surged an impressive 0.6%, well above the 0.3% expected. You have to feel somewhat encouraged that consumers are still spending in light of the issues. What we want to see is a rise in spending on non-essential goods and services, specifically big-ticket items.

My economic analysis leads me to believe that consumers will continue to think hard before spending. It will be really tough for retailers in Europe given the debt crisis, as consumers cut back on spending.

The S&P Retail ETF (NYSE/XRT) is around the midway point of its 52-week range, as the stock market stalls after upside moves.

In my view, it’s essential to look for same-store sales growth in retailers that sell non-essential goods. Increases here mean that consumers are spending on goods and services that are non-essential. These include electronics, appliances, furniture, autos, and other big-ticket items. Watch for the Durable Goods Orders report next Wednesday.

The best stocks in the retail space continue to be the discounters and big-box stores.

But, as I have said on numerous occasions, we need to continue to see jobs created and for the housing prices to halt their slide and reverse to the upside. The surge in housing prices was a catalyst in the consumer spending boom leading up to 2008, when homeowners borrowed heavily on their surging home values to spend excessively on travel, renovation, and other big-ticket items. Unfortunately, this is no longer the case, as home prices have plummeted and homeowners are fighting hard to keep their homes.

Retail growth will be more sustainable once jobs and housing recover.

I talked about the negative impact of weak consumer confidence on the stock market and the rest of the economy in Stock Market, Housing Market, GDP Growth: It’s All About Consumer Confidence.

The problem is that a country without strong jobs creation is very concerning, as I discussed in SOS—America Needs Help.