Does the idea of 10,000 shuttered retail stores scare you? If you've been snapping up "cheap" retail stocks lately, it should. As beleaguered consumers change their spending habits, the retail landscape could face major upheaveals, and some retailers might not survive.
Despite the frequent earnings "beats" many companies reported in their most recent quarterly reports, top-line sales are still lagging. Cash-strapped consumers spell trouble for weaker retailers -- and for investors who looked for "cheap," but forgot to check for "weak."
A quick turnaround? Don't count on it
The disturbing 10,000-store figure above comes from a Grant Thornton report, which projects that retail's casualties could reach that mark by the end of the year. Investors shouldn't forget that the fourth quarter of the year, with its all-important holiday shopping season, is crucial for retailers. Do you really expect that the end of retail's year will be merry and bright?
Consumers are too busy paying down debt to spend as lavishly as they have in the past, and they've got a long way to go on their bills. Consumer debt outstanding decreased in June for the fifth straight month -- but it still stands at a staggering $2.5 trillion.
In the long run, it's good that consumers are paying down debt and increasing their savings; in the short run, it's murder for retailers. Borders'
Consumer confidence figures may have improved slightly in recent months, but that shouldn't lull anyone into a false sense of security. Witness the renewed popularity of layaway programs, which have bounced back as consumers' access to easy credit dries up. Sears Holdings'
In June, my Foolish colleague Morgan Housel explained why we could take years to recover. Despite consumers' progress on reducing leverage, the average ratio of household debt to disposable income was still a staggering 127.9% at the end of the first quarter this year. We're clearly nowhere near close to a healthier amount of leverage -- which suggests that retailers shouldn't expect an uptick in spending anytime soon.
Don't be on the wrong side of the purge
Wrecking balls will hit some malls. We will have to kiss some retailers goodbye (Circuit City, anyone?). Many retailers are still staggering along right now, bleeding sales, but the future looks grim for those with tarnished brands or too much debt on their balance sheets.
The news isn't all bad, though. If consumer spending really was inflated by an artificial bubble, it stands to reason that we don't actually need all those retailers out there. And retail survivors will face a brighter future of diminished competition.
Remember, there are strong retailers out there. Aeropostale
During the bubble, consumers binged at the all-you-can-spend credit buffet. Now, alas, it's time for an unhappy purge. The ruthless forces of the economy will wipe out many retailers. If they want to avoid painful losses, investors should do likewise with the weakest links in their portfolios.
Home Depot, Sears, and Wal-Mart are all Motley Fool Inside Value selections. To find out why, try it free for 30 days.