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The Great Retail Fail

Sean Williams
May 20, 2012

Sunny days are here again -- or are they?

The latest round of retail same-store sales figures gathered from 18 retailers around the U.S. wasn't good. After months of crushing expectations, same-store sales figures at some of America's most popular shopping destinations, including Costco (Nasdaq: COST  ) and Target, missed Wall Street's expectations. In Costco's case it was because ticket sales growth slowed while Target fell short of its mark despite noting that its sales trends remain on the right path.

But the collective same-store disappointments of the sector points to a group of much larger problems that Wall Street and investors have been happy to overlook for the past couple of months. Based on these warning signs, which are both macro and micro in nature, I think we're on the verge of yet another round of "retail fails" as earnings begin to trickle in from the retail sector.

1. Good weather doesn't count!
I only wish we could rewrite the disclosure and forward-looking statements for retailers to include something about acts of nature and how they affect a company's overall profitability.

An unusually warm winter in many places artificially boosted retailers' same-store sales over the months before Apri,l and investors mistook this as a sign of strength across the sector. My simple rule is that anytime perpetual underperformer Gap (NYSE: GPS  ) shows an 8% rise in same-store sales (as it did in March) over the prior year, either someone misplaced a decimal point or the test is broken.

Last winter tended to be particularly harsh, which had many consumers opting to stay home rather than shop. In addition, an early Easter in 2011 boosted sales. Devoid of this apples-to-apples comparison, investors have been buying blindly into the sector because of a few months of good weather. Gap reverted back to the norm again in April and posted a 2% decline in same-store sales.

2. Where's the wage growth?
Retailers need two things to get consumers to make a purchase: They need to have the right product, and they need the consumer to have disposable income available for the purchase. That last part is proving considerably more challenging over the past two years.

Sources: Bureau of Labor Statistics,, authors calculations.

You may recognize this chart, as I used it just a few days ago to describe one of the multiple reasons I'm holding off making any purchases at the moment. But this chart is much more than just a reason to hold back on buying stocks. It points to a very, very big reason the economy can't find its footing. As long as the price of goods (fuel included) continues to outpace the growth of workers' wages, there's very little hope that any uptick in consumer spending will be sustainable.

The gap between the inflation rate and wage growth could also be one of the reasons we're witnessing a rise in credit card usage among Americans after a few rare years of credit usage declines in the years prior. Either way, it's not a sustainable (key word) pattern.

3. Expectations are too high
You could partially relate this one back to the warm-weather effect, but overall expectations for a retail revival have been too high for a long time.

Last week, Abercrombie & Fitch (NYSE: ANF  ) fell off a cliff after reporting first-quarter results that failed to impress investors. Highlighted in its earnings report, among the rising costs of raw materials and expanding internationally, was weakness in the "challenging European market." Without using those exact words, that's the same message Abercrombie sent in the fourth quarter and in the previous quarter before that. Did Wall Street and investors get a clue? No. They just assumed the ship would right itself.

You could very easily add J.C. Penney (NYSE: JCP  ) and Sears Holdings (