Retail Stocks Are Crashing at the Fastest Pace in Years
Media pundits are doing their best to paint a rosy picture of the U.S. economy, but the recent crash in retail stocks shows the country could be on the verge of a recession, and even an economic collapse in 2016.
As was expected, the selling frenzy triggered by the world’s biggest retailer, Wal-Mart Stores, Inc. (NYSE:WMT), is trickling down to other retailers now. The tremors are being felt across the board, with grocery stores, drugstores, and specialty retailers all getting hit by anemic consumer spending. It wouldn’t be wrong to say that U.S. retail stocks are already crashing.
The leader in the retail industry, Wal-Mart, guided lower for the next two years. Following in Wal-Mart’s footsteps, Macy’s, Inc. (NYSE:M) and Nordstrom, Inc. (NYSE:JWN) have both posted depressing results this week. While J. C. Penney Company, Inc. (NYSE:JCP) and Kohl’s Corporation (NYSE:KSS) may have temporarily saved the day for retailers, but both hinted at weakening spending. Prior to the quarterly report, JCPenney went for job cuts at its headquarters to save some bucks, while warning of lower sales going forward. Kohl’s reported much better numbers than were expected, but indicated weaker-than-expected sales for the month of September.
Now, the National Retail Federation is forecasting holiday sales to range between three percent and seven percent, higher than the last 10-year average of 2.5%. (Source: “National Retail Federation Forecasts Holiday Sales to Increase 3.7%,” National Retail Federation, October 8, 2015.) This may look good on a cursory level, but if you analyze it closely, the 10-year average of 2.5% includes years of the last Great Recession. This is clearly not an apples-to-apples comparison, unless the NRF considers us to be heading down the same road again.
The S&P’s retail SPDR exchange-traded fund (ETF) has been on the decline in the last three months and it doesn’t seem like the market for retail will rebound anytime soon. The downtrend has probably set in for this year and will likely continue through the next.
Chart courtesy of www.StockCharts.com
Case in point: consumer spending is widely off the mark set by the Federal Reserve. The seriousness of the matter can be gauged from the fact that almost all of these retailers are trying to save face by pushing for bottom-line beats. The only strategy that’s been working for them so far is issuing new or extended stock buyback programs. By decreasing the outstanding number of shares, companies are being able to report per-share figures in the green.
But these gambits can only work for so long. The debt-financed buybacks are not sustainable in the long run. Retailers like Wal-Mart and Nordstrom have bought back stocks at higher levels only to watch their stocks crash afterwards. The debt-backed stock buyback programs at the current low interest rates are only adding to these retailers’ ever-growing debt burden. You can imagine what will happen should the rates go up.
The situation is becoming increasingly paradoxical. On one hand, the Federal Reserve is hinting at a rate hike, citing improvement in economic indicators; on the other hand, consumer spending has been shrinking. At this critical juncture, should the Fed go for a rate hike, which in all likelihood it will, the U.S. consumer market is going to head for an economic collapse. Anybody who tells you otherwise is either lying or is oblivious to the seriousness of the situation at hand. Hedge yourself wisely!