Retail Sector’s Limping Along

retail stocksWomen’s retailer Talbots Inc. (NYSE/TLB) axed its sales estimates for the third quarter and 2010 to negative growth. This is not encouraging, but may be more store-specific than industry wide. Nevertheless, given the current mood in the retail sector, there could be some tough times ahead.

For consumers to spend, they need to feel good and confident. Consumer Confidence for October came out at 50.25, which was above the estimate of 49.0, but was the weakest reading since February 2010. In general, a reading of over 90 indicates a healthy and growing economy, so the number is dismal and clearly points to continued nervousness on the part of consumers.

Retail Sales for September saw a rise of 0.6%; better than the 0.4% estimate, but down from the 0.7% reading in August. Excluding auto, the core number rose 0.4%, in line with estimates, but was below the 1.0% reading in August. 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.

The key is to look for same-store sales growth in retailers that sell non-essential goods. Increases here could mean consumers are spending on goods and services that are non-essential, such as electronics, appliances, furniture, autos, and other big-ticket items.

Watch for the Durable Goods Orders report to get an indication on how the sales of big-ticket items are doing. Durable Goods Orders for September increased 3.3%, above the estimate of 1.8% and the negative one percent reading in August, but the number was due largely to a rise in commercial aircraft orders. Excluding transportation, Durable Goods fell 0.8% compared to the estimate of 0.2% growth, well down from 1.9% in August. The reading was a disappointment and continues to point to fragility in non-essential spending.

Our favorites in the retail space continue to be the discounters and big-box stores. The big-box stores are now selling a broad range of electronics and are adding to their product line. This will offer consumers a one-stop place for shopping. The king of cheap is Wal-Mart Stores Inc. (NYSE/WMT), which continues to be the best of breed in retailing due to its global footprint, massive buying ability, and discount prices.

As I have said in numerous occasions, we need to see jobs created and 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.

Watch the third-quarter gross domestic product on Friday, where estimates call for growth of two percent, only a marginal improvement from 1.7% in August.

With the third-quarter earnings, you need to watch the retailers closely, especially what they say about the holiday shopping season that traditionally begins with Black Friday on November 26, the day following Thanksgiving. Retail growth will be more sustainable once jobs and housing recover.