American consumers opened their wallets a little wider in June as same-store sales chalked up an impressive 3.1% increase last month, according to a 28-company poll from Thomson Reuters. That's an improvement over May's bump of 2.5%. So are retail stocks prime for the picking? Wharton professor Stephen Hoch says not so fast. He doesn't think "the consumer is going to step up to the plate and spend us out of the economic doldrums." With that kind of conflicting information, what's an investor to do?
Don't worry. With a little more information, we can figure out what to do. Let's look at some additional data so we can make up our minds.
Why it's time to go long
Americans love to shop. There's no question about that. In fact, since bottoming out at the end of 2008, retail sales have shot back up, according to data from the St. Louis Federal Reserve. It may not be at the same level as when the economy was booming, but the other great American pastime remains intact.
If a retailer has the right product at the right price, customers will beat down its doors. Look at Aeropostale
Finally, as stock prices have fallen, retailer stocks are becoming more attractive. Wal-Mart
Find some shares to short
To boost sales, many retailers have resorted to discounting. As a result, margins have shrunk. American Eagle's
Consumer deleveraging continues to take its toll. According to the latest Federal Reserve data, consumer credit contracted at a seasonally adjusted rate of 4.5% in May. Those without credit concerns continue to loosen their purse strings, as evidenced by the 14.1% jump in same-store sales for high-end retailer Nordstrom
Lower margins and fewer purchases lead to only one thing: lower returns. And investors do not like lower returns. During the good times, Abercrombie & Fitch
My take
I'm short. The road ahead is, in my opinion, going to be very rough. Retailers will have to continue to work hard to generate sales growth and margins are likely to continue to suffer. The silver lining is that if performance doesn't meet expectations, investors are likely to sell and push stock prices down further. That's when I'd love to swoop in and buy up the great deals in the bargain bin.
I've given my opinion, but what do you think? Put your long or short vote in the comments box below. And don't forget to put your longs and shorts in CAPS.