All Eyes on Retail Stocks

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

With the third-quarter earnings soon to begin, 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 26, the day following Thanksgiving.

For consumers to spend, they need to feel good and confident. Consumer Confidence for September came out at a disappointing 48.5, which was below the estimate of 53 and represented 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.

The headline Retail Sales for August saw a rise of 0.4%, which was better than the 0.3% 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.

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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. These include 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 August were encouraging. Excluding autos, Durable Goods increased a nice two percent compared to the estimate of 0.6%. With autos, orders fell 1.3% — better than the decline of 1.4%. The ex-auto reading is encouraging and is exactly what the market needs at this time, yet we need to see a sustained rise in Durable Goods going forward.

My favorite in the retail space continues 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 lines. This will offer consumers a one-stop place for shopping. The king of cheap of course 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.

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.