Retail Stocks Still Iffy

The retail sector continues to be precarious, as evidenced by another muted month in April. According to a report by the Commerce Department, retail sales excluding autos increased a mere 0.5% in April, which was marginally better than expected, but the headline retail sales number fell 0.2%, in line with estimates. The April showing was the second decline over the past three months, driven by high gasoline costs and fading consumer confidence.

Department sales continued to be poor and were down 0.1% in April, as shoppers headed for the discounters. More specifically, declines were seen in clothing and specialty stores, while increases were seen at electronics and appliance stores. Furniture stores saw a slight rise. The increases in sales in big-ticket items like furniture and appliances were a bit of a surprise given that these areas tend to decline when spending declines. Watch to see if this occurs over the next few months.

The reality is that, over 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, which has negatively impacted household wealth and created a poverty effect. Given the decline in overall material wealth, we are clearly seeing a decline in consumer spending.

Companies like Costco Wholesale Corporation (NASDAQ/COST) and Wal-Mart Stores, Inc. (NYSE/WMT) could benefit from the thrift spending.

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Retailers that sell non-essential goods at regular prices will suffer. As I have said on numerous occasions 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 should also look at buying on extreme weakness with brand-name retail stocks. Sometimes the best time to buy is when there is chaos.