What’s up with the Retail Sector?

While financial stocks are showing some optimism, the same cannot be said of the retail sector, which continues to be looking to attract shoppers. If you think the retail issues are not impacting discount chains, think again. Costco Wholesale Corporation (NASDAQ/COST) announced that its fourth quarter and fiscal 2008 earnings ending in August would fall short of Wall Street estimates.

The retail problems appear to be systemic and not focused in a particular area. The higher gasoline prices are clearly impacting the way consumers shop. Higher gasoline and food costs are also taking a bigger chunk out of what is available to spend for other non-discretionary goods and services.

The Conference Board Consumer Confidence Index for June fell to its lowest point in about 16 years after reporting a reading of 50.4 compared to 58.1 in May. The reading at just above the contraction level was well below the estimated 56.0 predicted by economists in a Thomson Financial/IFR survey. Worst yet, consumer confidence has declined for seven straight months and, in my view, continues to suggest additional slowness in the economy and will impact corporate profits,

Retail sales for June grew a mere 0.1% versus the 0.4% estimate, and below 0.8% in May. Excluding auto, retail sales grew 0.8%, which was below the 0.9% estimate and 1.2% in May.

The reality is that the retail sector will continue to struggle and will need to mark down goods to clear inventory, which in turn, pressures margins. If you are a shopper, it is great; but, for the retailers, it is a problem that will continue until the economy and jobs picture improves.

The ripple effect from the housing market may continue to spread unless we see some stability in the credit and housing markets. My advice is to continue to tread carefully in retail. The slowdown will continue to impact retail stocks, although you should also look at buying on extreme weakness with brand name retail stocks. Sometimes the best time to buy is when there is chaos.