Chaos in Retail Sector Could Mean Chance to Buy

For the past year, I have been warning readers about the risk of investing in retail stocks given the declining consumer confidence, higher gasoline prices, and the weak housing market that has negatively impacted household wealth and created a poverty effect.

Here we are in April with the spring season upon us… and guess what? Shoppers continue to remain tepid and are staying away from purchasing non-essential goods. The reality is that consumers are not lining up at the malls waiting to buy goods. Given the decline in overall material wealth, we are clearly seeing a decline in consumer spending.

Data just came out that showed retailers struggling to attract shoppers in March. The focus remains with buying essentials and those goods necessary to survive. No new cars, appliances, or electronic goods, or splurging on a fancy restaurant. Instead, shoppers are heading to the discounters and wholesale clubs to conserve money.

Companies like Costco Wholesale Corporation (NASDAQ/COST) and Wal-Mart Stores, Inc. (NYSE/WMT) could benefit from the thrift spending. In fact, Wal-Mart increased its earnings outlook in light of the weak retail sales. Costco saw its sales jump seven percent year-over-year.

Retailers that sell non-essential goods at regular prices will suffer. As I have said on numerous times in past commentaries, the news points to a slowdown in the works.

My view on the retail sector remains the same. The ripple effect from the housing market may continue to spread unless we see some stability in the credit and housing markets. We are seeing weakness across the board from the discounters to higher-end luxury goods retailers.

My advice is to continue to tread carefully in retail. A slowdown and/or recession could kill retail stocks, although you could also look at buying on extreme weakness with brand-name retail stocks. Sometimes the best time to buy is when there is chaos.