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OK, many of us suspected December retail sales were going to be something akin to retail holiday hell. It looks like the reality was worse than many folks had even imagined.
Overall retail sales dropped 2.7% in December; economists had expected only a 1.2% decrease. Meanwhile, this is the sixth straight consecutive drop in monthly retail sales.
Granted, some of this decrease was due to the precipitous drop in gasoline prices. But it's abundantly clear consumers are worried -- or totally strapped, especially now that they can't rely on credit the way they were -- and pulling way, way back.
Seeing theory at work
Keynesian economic theory talks about the "paradox of thrift," and that concept goes a long way in explaining our economic troubles these days. Of course the economy contracts when people start saving instead of spending, and the retail sales data reflects consumers' new frugality (or fear, or financial messes they've made). I may not agree with many things about Keynesian economic theory, particularly some of its prescriptions for recovery, but I have to say the paradox of thrift is certainly a good way of describing what ails us.
Given the fact that consumer spending is the lion's share of gross domestic product, and we're coming off a major bubble where many people were spending because of easy credit and using their homes as ATM machines, of course the economy is slowing precipitously. Now consumers suddenly recall a little something called "thrift" (and, I might add, fiscal common sense).
We most certainly were on a fiscally irresponsible and ultimately unsustainable route while we were in the middle of red-hot economic "growth," but the unwinding means things are now definitely ugly for the retail industry, which expanded along with all that drunken-sailor spending.
More ugly tidings, too
The December retail sales number comes along with a raft of other bad retail news. Gottschalks has filed for Chapter 11 bankruptcy protection. We'll see many more such news headlines out of ailing retailers.
Tiffany's (NYSE: TIF ) "blue box" is a little bluer than usual; its dismal December illustrates the idea that luxury goods are not necessities and excessive luxury is no longer "in," or even feasible for many people. Best Buy (NYSE: BBY ) may be a strong contender in the consumer electronics space, but its blue Christmas tidings show that consumers aren't even lured by gadgets nowadays.
And of course, last week's holiday comps data illustrated that even Wal-Mart (NYSE: WMT ) , which has been extremely successful in the downturn with its low-priced mission, isn't infallible when consumers are tightening their belts.
Shop, but carefully
This is an ugly situation, but it needs to happen. Our economy must correct after all the bubble speculation and spending. I know it's going to be painful, but at the same time, weeding out weak businesses is an economic reality (and the bubble times were based on anything but economic reality, since people were spending money they didn't have with abandon).
As I've said many times before, I don't believe investors should steer clear of retail stocks entirely. However, they should show extreme discrimination and realize the near term is going to be rough. Second-tier retailers laden with debt and trading as penny stocks aren't going to prove to have been bargains if and when they finally succumb to the economic headwinds. Don't be tempted by those supposedly "cheap" stock prices of retailers like Borders (NYSE: BGP ) and Talbots (NYSE: TLB ) .
High-quality retailers with strong brands are key, as are strong balance sheets with plenty of cash and no debt. Discounters like Wal-Mart and Costco (Nasdaq: COST ) are great investment ideas at the moment because they directly appeal to consumers' current desire to save. I think retailers like The Buckle (NYSE: BKE ) are good ideas, too -- the ability to buck the trends that have been so awful for so many other retailers over recent months seems like an interesting opportunity.
If some weaker retailers get bounced out of existence, it will mean more market share for the strong survivors. But you don't want to be on the wrong side of that equation, so remember to be careful, Fool, and go for quality. Some retailers will go by the wayside -- the December sales figures simply underline the warnings that it's a dire time in the industry.
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