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.
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.
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.