Is Retail Doomed?

Are consumers feeling good enough about their budgets to spend consistently again? Don't hold your breath.

Consumer spending showed some signs of life a few months ago, but its sustainability has remained a major question. May's disappointing retail sales data, especially following the cruel month of April, implies that the path ahead will hardly be smooth for retailers. Pick your stocks carefully, and cull the weak (or overpriced) contenders from your portfolio.

Malaise in May
According to Thomson Reuters' analysis of 28 retailers, sales at stores open at least a year increased 2.5%; Wall Street analysts had estimated sales would rise by 2.6%.

Let's take a look at a few specific retailers' May results.

Company

May Comps

May Net Sales

Costco (Nasdaq: COST  )

9%

11%

Target (NYSE: TGT  )

1.3%

3.7%

Abercrombie & Fitch (NYSE: ANF  )

(3%)

10%

Hot Topic (Nasdaq: HOTT  )

(9%)

(7.4%)

Buckle (NYSE: BKE  )

(5.4%)

(0.4%)

Macy's (NYSE: M  )

1.4%

2.6%

Nordstrom (NYSE: JWN  )

3.7%

7.8%

*All data from company press releases.

For many of these retailers, the data doesn't look too terribly bad on the surface. Still, investors are responding negatively, probably because many of these sales figures missed analysts' expectations. For example, both Costco and Nordstrom missed Wall Street's predictions for May comps increases of 9.7% and 4.8%, respectively.

As we head into the long, hot summer, consumers may already be starting to wilt. MasterCard's Spending Pulse revealed that consumers started cutting back on purchases of things like appliances, clothing, and shoes.

Summer's a trifle hot for kids garbed in black, and Hot Topic's major drops in comps and sales may foreshadow further sagging this summer. Another teen retailer, Abercrombie, delivered a 10% increase in net sales, but its May comps decreased, despite poor performance in the last few years. Last May, Abercrombie's same-store sales plunged a nauseating 28%, a drop that should have created an easy opportunity to perform better. Abercrombie remains a risky proposition for investors.

Buckle has a historical tendency to outperform with its monthly comps, so investors might want to interpret that stock's weakness today as an opportunity; it trades at a lower P/E multiple compared to many other retailers, too. Buckle performed amazingly well even in the depths of the recessionary sentiments, so investors shouldn't underestimate its strength in the retail realm.

Stay safe
Tread carefully with retail stocks. The economy remains fragile and weak, and the high unemployment rate is still a major drag on any sustainable consumer spending. Hewlett-Packard recently announced plans to cut a net 3,000 jobs over the next few years, suggesting that we're not out of the woods by any stretch.

Keep an equally cautious eye on retailers' business behavior. When I recently asked whether consumers have really made a comeback, some luxury retailers had already begun ratcheting up prices again. Such business decisions might prove too premature -- and ultimately foolhardy. Companies like Nordstrom and Abercrombie could really suffer if consumers balk at high prices in these trying times.

Retailers with strong brands, little or no debt, and discount appeal in a frugal environment are the safest stock ideas. After all, consumer spending seems likely to remain somewhat depressed for the near future, barring occasional splurges like this past spring.

Sound off on retail stocks -- or the health of consumers -- in the comment box below.

Costco is a Motley Fool Inside Value recommendation and a Motley Fool Stock Advisor selection. The Fool owns shares of Costco. Try any of our Foolish newsletters free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


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