Keep a Close Eye on the Retail Sector

The trend for retailers continues to be one of trepidation and uncertainty. The reality is that consumers are not lining up at the malls waiting to buy goods. Given the decline in overall material wealth driven by the housing crisis, we are clearly seeing a decline in consumer spending in what is called the “poverty effect.” When housing prices decline, homeowners believe they are poorer and hence spend less, which impacts the economy. Lower prices translate into less material wealth and this negatively impacts the way homeowners spend, especially in regards to bigger ticket items.

Some evidence of this was the news last week that bellwether retail giant Wal-Mart Stores, Inc. (NYSE/WMT) saw its key same-store sales in January rise an anemic 0.5%, which followed an equally weak 0.7% increase during the all-important December shopping month.

Overall in the retail sector, retailers reported the weakest January results in close to 40 years. A report produced by the UBS- International Council of Shopping Centers pointed to a weak 0.5% increase in same-store sales in January based on the results of 43 retailers, which was well below the 2.1% increase in January 2007, as well as the 1.5% increase estimated by analysts.

As I have said numerous times in past commentaries, this report suggests that a slowdown is in the works. A fear of a recession is spreading through the stock markets and it is driving sustained bearish sentiment in trading.

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. There was even news that some retailers in New York City are beginning to accept foreign currency at their stores in order to drive sales and, given the weakness of the U.S. dollar, it makes a whole lot of sense.

My advice is to continue to tread carefully. A slowdown and/or recession could kill retail stocks.