3 Reasons the Holidays Will Be Horrible for Retail

The climate for retail stocks right now is bleak. Investors should ponder a three-pronged challenge these companies face right now, and brace themselves for what's coming. Many signs indicate that the holidays don't promise to be merry for retail revenue. On a more macro level, the American economy's strength is tied to these factors, too.

Get ready for one heck of a cold, scary sleigh ride.

From bad...
Many retailers lowered their forecasts for the current quarter during earnings season's onslaught. It may have been difficult to put two and two together when Halloween hadn't even come and gone yet, but the current quarter includes the shopping-centric holiday season that starts in earnest on Black Friday (or Thanksgiving, now that retailers have become so desperate).

In August, retailers such as Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  )   admitted that many consumers are deeply worried about their budgets. Many Americans are strapped for cash, still intensely concerned about prioritizing and affording basic expenses like food, energy, and gas. These concerns, or even running out of scant financial resources, slow discretionary spending.

Teens are often relatively unfazed by economic concerns, but they also rely on Mom and Dad and part-time jobs. Teen unemployment remains extremely high. Not surprisingly, teen retailers Abercrombie & Fitch, Aeropostale, and American Eagle Outfitters either delivered awful quarterly results or ratcheted down fourth-quarter expectations.

In mid-October, eBay (NASDAQ: EBAY  )  threw in with the pessimism surrounding the holiday season while discussing third-quarter financial results. It was easy to take eBay management's comments as proof of that particular Internet retailer's difficulties, but CEO John Donahoe indicated that there is softness in the e-commerce area in general.

...to worse
Last month's government shutdown hurt many Americans' confidence. Lots of workers were told to stay at home without paychecks while the closure dragged on. Many reduced spending because they didn't have the usual amount of money coming in the form of their regular paychecks.

Some remain spooked about the entire situation. After having experienced a government shutdown that lasted for more than two weeks, there's good reason to sock away money for a rainy day. That means, again, less discretionary spending.

The Conference Board revealed last week that its consumer confidence index plunged to 71.2 in October from 80.2 in September. It's not an insignificant factor, since consumers represent 70% of economic activity.

Other consumer confidence indexes show a similar trend. Thomson Reuters/University of Michigan data also showed a plunge from September's 77.5 to 73.2 in October. Polled Americans pointed to the government shutdown as reason to believe the economy will deteriorate, and on an individual level worry about their own financial stability.

Speaking to habits during the shutdown, a Goldman Sachs survey conducted from Oct. 10 to Oct. 15 found that 2 out of 5 Americans cut their spending. Although the hit affected low-income consumers more than their higher-income counterparts, even those making more than $100,000 cut spending by 32%.

More bad economic drag
Supplemental Nutrition Assistance Program (SNAP) funding -- also known as food stamps -- is an additional factor that fits into the cogs of the consumer spending machine in the fragile economy.

Wal-Mart consistently talks about the difficulties lower-income Americans face, and the situation will likely also squeeze the rock-bottom bargain stores like Dollar General, Dollar Tree, and Family Dollar. The ripple effects can, of course, spread even more far and wide.

It should be pretty obvious that reductions in SNAP funding will further curtail many recipients' ability to buy goods. About 8% of shoppers receive the assistance, and the funding cuts and the continued political wrangling that could result in a 3 million drop in eligible recipients will constrain many budgets even more.

The economic situation in this country is extremely shaky, and regardless of the fashionable rose-colored glasses peeking at the marketplace, the ugly truth is that unemployment is still very high, and underemployment is yet another factor that's making life difficult for Americans.

Economic almanac: A tough, tight winter
Months ago, it wasn't rocket science to theorize that it would be a sour, sedate holiday season. It's a reason retailers began nagging us about Christmas and the winter holidays even before Halloween. We can expect more of a fevered pitch due to desperation. Many retailers will be forced to kill their margins and run super-sales to drive sales volume. These are terrible omens.

The ripple effects of so many politically charged economic moves recently are providing even more daunting, and holiday timing is very bad.

Regardless of stances anyone has on these issues, there's usually an unexpected price to pay for every move, including events such as government shutdowns. In tough times, these costs are even more painful and difficult for so many people.

Retail takes the temperature of the situation, and it's not good.

Investors should tune into the situation that's brewing. In all cases, given these scary economic cold spots, investors should focus on buying the strongest companies, and remember they can also look for post-holiday bargains.

Hold on tight, though. It's going to be a bumpy ride, but long-term investors who choose their stocks wisely will weather these storms far better than those who may not see this difficult winter coming.

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  • Report this Comment On November 09, 2013, at 7:53 PM, ceh4702 wrote:

    A lot of the problem is legislation like Obama care. It hurts the poor, the lower middle class and the rich. Poorer part-time workers are limited in the hours they are allowed to work. Lower middle class make too much money to get assistance for obama care, however they often cant afford to buy insurance unless they starve to death or live on the streets. The Rich have to pay higher taxes. Just wait till next year when everyone is faced with a penalty. That sure will help the holidays. Are we free or are we slaves?

  • Report this Comment On November 09, 2013, at 7:58 PM, ceh4702 wrote:

    You will probably also face some kind of raise in the minimum wage. However, dont expect the minimum wage to be $15 an hour. Some college trained employees are lucky to be paid $12.00 an hour.

  • Report this Comment On November 09, 2013, at 8:08 PM, ceh4702 wrote:

    I listen to a financial program on Saturday and they were discussing the real possibility of Deflation. No reason to buy goods in an unsteady market environment. Even if earnings seem to be up for many companies, that does not always have a connection to actual cost of living. Even the gross domestic product and the inflation numbers do not seem to be connected to cost of living. There is a disconnect there. For instance instead of reporting new jobs we should be reporting Job hours. New jobs and limiting workers to 29 hours is not good for the economy unless we want to create more poor people.

  • Report this Comment On November 10, 2013, at 12:43 AM, Helmetbreaker wrote:

    The Obama administration's premium increases because they want everyone on a same for all plan with bells and whistles that almost all people don't want or need, is a huge factor on consumer confidence. Combine that with Obama's war on coal that will make electrical rates skyrocket and all the factors listed above, the Holiday spending will tank! The President promises to help the middle class but his policies are going to force many in the middle class to join the poor! 77% of the jobs created under Obama are part time and the percentage of people in the workforce continues to drop. And we have three more years of Washington spending and big government growth!

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