Market Overview

Should We Prepare for a Coming Retail Implosion in 2012?

In light of weak December retail sales, while the economy remains relatively stagnant and US consumers are squeezed by rising gas prices, should we prepare for a coming retail implosion by the time the 2012 holiday season arrives? For several reasons, I believe an upcoming retail implosion may very well be on the horizon.

When considering the prospect of a retail implosion in the 2012 US economy, a trader is bound to think of Sears Holdings Corporation (NASDAQ: SHLD). Though Sears Holdings has risen 15 percent in the past week, over the past three months Sears Holdings has fallen over 50 percent. This situation does not bode well for the retail sector going forward.

In the aftermath of the holiday season, as Kmart and Sears have struggled, traders can find even more disappointment from Kohl's Corporation (NYSE: KSS). Kohl's has fallen nearly seven percent in the past month at a time when perhaps some were looking to the retail sector for economic salvation. Though Mad Money's Jim Cramer spoke well of Kohl's in November 2011 and continues to display Kohl's shirts and Kohl's socks on the CNBC show, Kohl's fate in the wake of the holiday season seems to be quite a disappointment. For such a retailer that appeals to middle-class consumers to fall as such is quite ominous.

While Macy's (NYSE: M) and Dillard's, Inc. (NYSE: DDS) have emerged relatively strong with the holiday season over, Saks Incorporated (NYSE: SKS) and Nordstrom (NYSE: JWN) have not. Target Corporation (NYSE: TGT) has also fallen since the end of the holiday season, dropping nearly 6 percent in the past month. Wal-Mart Stores, Inc. (NYSE: WMT), the king of all retailers, has remained relatively steady for 2012 thus far around $59 per share -- near its level at the climax of the 2011 holiday season. That being the case, Wal-Mart has risen over 7 percent over the past three months.

Reuters reported Thursday that "[r]etail sales rose at the weakest pace in seven months in December as consumers pulled back late in the holiday shopping season, cutting purchases at department stores and spending less on electronic gadgets." According to Lindsey Piegza, an economist with FTN Financial, "Rather than resorting back to pre-recessionary spending patterns [consumers] practiced safe shopping habits." The closing of Borders Books & Music and possible issues of lackluster shopping at Best Buy (NYSE: BBY) may have also contributed to consumers' changing shopping habits.

In July 2011 I explored the radical changes in holiday shopping that I have noticed in the past few years. Where readers may be putting down books and picking up an Amazon Kindle Fire (NASDAQ: AMZN) and where listeners may be putting down the cd's and getting music from iTunes per Apple Inc. (NASDAQ: AAPL), consumer shopping habits are indeed changing -- and these new habits have significant implications for the retail world. As for books, even with the loss of Borders, it is significant to note that Barnes & Noble, Inc. (NYSE: BKS) has fallen nearly 34 percent in the past year. Books-A-Million, Inc. (NASDAQ: BAMM) is equally as depressing, dropping 53.9 percent in the past year.

In late November 2011 after the kickoff of the holiday shopping season, I discussed how many Americans fear not being able to afford holiday shopping. I wrote, "Owing to rising energy costs, stagnant incomes, and financial woes, half of Americans are now concerned that they will not be able to afford holiday shopping this year." If that was the situation this year for this past holiday season, the 2012 holiday season may be even worse. As MarketWatch's Ruth Mantell discussed on Friday, "[p]aychecks will grow in 2012 -- but not much."

Taking into account high unemployment, stagnant incomes, and a stagnant economy, as I wrote back in July 2011, "we can always give food as gifts during the holidays." That's pretty much what I did this year. I got my family gifts of food, alcohol, and chocolate from primarily World Market (and also a handful of Chipotle (NYSE: CMG) gift cards), and I saved quite a bit of money in the process. Even back in July 2011, I praised Cost Plus, Inc. (NASDAQ: CPWM) as a good company for US consumers during the holiday season, and in not making their workers show up to work at midnight and opening at 7 a.m. on the day after Thanksgiving, World Market treats their workers like humans.

Traders who saw Cost Plus, Inc. as a good holiday season opportunity were surely not disappointed; Cost Plus is up near 25 percent over the past year and has risen nearly 65 percent over the past three months. From a stock market perspective, the difference between Kohl's or Target and World Market or even Costo (NASDAQ: COST) seems to reflect a significant change in how the US consumer is approaching shopping. Though Costco has fallen a handful of dollars since the close of the holiday season, the company's stock is up over 12 percent for the past year.

Of course, online retailers also play a role in changing consumer habits. Amazon.com, Inc. (NASDAQ: AMZN) was a competitor that was able to gain the upper hand on Borders Group, Inc. Far from having to deal with holiday shopping crowds, more customers shopping online for better deals and convenience may further take away in-store business from companies like Kohl's, Macy's, and Dillard's. The dominance and one-stop-shopping accessibility of Wal-Mart also does not help the situation for competing retailers.

As the US consumer is being pulled on from all sides, one who would normally do his shopping by driving to Kohl's and going into the store may find himself shopping elsewhere. For instance, one shopping for quality flannel shirts may go to the Tractor Supply Company (NASDAQ: TSCO) instead of Kohl's or Dillard's. One shopping for quality Teva footwear from Deckers Outdoor Corp. (NASDAQ: DECK) may decide to shop online rather than taking a chance at a crowded department store.

With respect to changing shopping habits, one must also keep in mind that younger generations may be shifting American cultural attitudes to a more anti-consumeristic and anti-materialistic perspective. Maybe the Occupy movement is a symptom of this fact. And while the question of whether younger generations are more or less consumeristic or materialistic is debatable, one must also take into account the specter of $5 per gallon gasoline. As I have written previously, if gas rises to $5 per gallon, "you could probably kiss the 2012 holiday season goodbye".

Taking all the above into account, I think that there are primarily two major issues that come into play with respect to problems in the retail world: money and labor. If the US consumer continues to lose disposable income owing to inflation, rising food costs, and rising energy costs, there are going to be less funds for goods at department stores and other retail outlets. This means less funds for goods and items that may not be necessary. To put this into perspective with the holiday season example, where your little brother or little sister may have wanted the new Coldplay cd or a gift card to Borders five years ago, now he or she may want a gift card to the Food Lion (NYSE: DEG), Giant Eagle, or Publix; if your sibling has more sophisticated tastes, perhaps a gift card to Whole Foods Market (NASDAQ: WFM). Higher food and gas prices are probably going to work to the detriment of meat-and-potatoes middle America retailers like Target, Kohl's, and Macy's.

A second major issue to take into account is labor, i.e. unemployment and underemployment. According to CNBC, "[t]he number of Americans applying for first-time jobless benefits rose last week...reversing a recent decline and suggesting the labor market remains brittle." As part-time and seasonal workers who were hired for the holiday season find themselves looking for jobs, current issues facing the US consumer and issues in the retail world do not bode well for those same jobs being around for the next holiday season. The Christian Science Monitor's Dave Cook reported Thursday that "the US Chamber of Commerce President Thomas Donohue offered a grim outlook...for cutting the politically sensitive unemployment rate, citing slow economic growth." There is a certain circularity to this dilemma as individuals cannot find jobs at the places that sell goods in order to gain the income to purchase the same goods that are at the stores they would be working for.

Thus, what occurred with the Borders Group and current struggles with Kohl's and Sears may be merely a prologue of what is to come in the retail sector. If a downward spiral results from belts tightening, squeezed US consumers, unemployment, inflation, and a drop in disposable income, the result could very well mean a retail implosion in 2012. That being the case, even if clothing, entertainment, and appliance retailers struggle, food retailers may be left with the upper hand in the midst of the 2012 holiday season.

ACTION ITEMS:

Bullish:
Traders who believe that the non-food big-box retail sector will implode in 2012 allowing food retailers to gain the upper hand on consumers' wallets might want to consider the following trades:

  • Check out Cost Plus, Inc. (NASDAQ: CPWM), Costco Wholesale Corp. (NASDAQ: COST), Wal-Mart (NYSE: WMT), and other various food-related retailers.

Bearish:
Traders who believe that the US economy may face a retail implosion in 2012 owing to unemployment and rising food & gas prices may consider alternate positions:

  • Short retailers like Kohl's Corporation (NYSE: KSS), Sears Holding Corp. (NASDAQ: SHLD), Macy's, Inc. (NYSE: M), Best Buy (NYSE: BBY), and Dillard's, Inc. (NYSE: DDS).

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Posted-In: CNBC Long Ideas News Jim Cramer Short Ideas Movers & Shakers Psychology Retail Sales Best of Benzinga

 

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