The shrinking of American retail
Posted
Feb 24 2009, 02:06 PM
by
Anthony Mirhaydari
Rating:
Everyone knew it was going to be tough. But as fourth-quarter results are reported, it's still shocking to see how bad the holiday shopping season actually was.
Deep discounts were needed to encourage sales, which pinched profitability. Macy's (M) revenue fell 7.7% during the quarter as earnings declined 59%. Target (TGT) saw revenue fall 1.6% while profits fell 41%. Sales at Office Depot (OD) were down 15% as it posted a loss of $1.5 billion. The list goes on and on.
This is just the beginning. America's retail industry is shrinking. Store closures, consolidation, and reduced expansion will bring per capita retail square footage back to levels last seen in 2003. As a consequence, millions will lose their jobs, investors in failed retailers will be wiped out, and shoppers will be presented with fewer choices at higher prices.
There are two dynamics at work here: credit and confidence. American consumers allowed their personal balance sheets to balloon. Backed by the unrealized gains of retirement accounts and home values, debt burdens peaked at 139% of income -- rising as much in the last seven years as it did in the past 39 years.
Obviously, the binge is now over. Bankers are pulling credit availability as delinquencies rise. American Express just started paying account holders $300 to close accounts as a way of reducing unwanted credit exposure. In fact, according to Credit Suisse, credit card lines have declined for the first time in more than 18 years. These trends will continue.
Credit availability has historically been one of the largest drivers of consumer expenditures. As it declines, and people can no longer substitute credit for savings in times of distress, expenditures are curtailed and rainy day funds are rebuilt.
So, as the ability to purchase -- through job loss, home equity loss, and now credit loss -- has diminished, the desire to purchase is falling as well. Consumer confidence has collapsed to a record low this month: From a high of 110, the Conference Board's confidence index has fallen to just 25 as the employment situation worsens and gas prices start creeping back up. All of these factors will boost the savings rate and reduce traffic in shopping malls across the country.
For investors, there are still winners to be had in this space. Companies with strong value propositions and enough scale to pressure concenssions out of suppliers will survive. And those that survive will be rewarded with expanded market share, enhanced pricing power, and renewed profitability as the retail sector is rationalized to the realities of a post-credit bubble economy. Companies like Wal-Mart (WMT), Dick's Sporting Goods (DKS), GameStop (GME), Best Buy (BBY), JC Penney (JCP), and Home Depot (HD) fit the bill.
Disclosure: The author does not own or control shares in any of the companies mentioned.
Anthony Mirhaydari is a contributor to the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.
Related reading:
JC Penney fights for survival
Retail sales jump won't last
No 'must-have' toy hurts sales for toymakers
Macy's cuts another 7,000 jobs
