These 6 Things Made June Retail Sales Really Ugly

Unfortunately, today's June retail sales report was a disappointment from many different perspectives instead of one. First, the core number was below a consensus that wasn't exactly anticipating anything too sexy. Second, the figures told a story of a consumer analyzing the economic headlines and applying it to their own personal circumstances in a way that overtakes a normally positive inducement to spend in lower gas prices (those circumstances include: the need to rebuild savings during off peek shopping periods; incurring of debt to pay for essentials (see increased credit card issuance by JP Morgan); limited hourly wage increases and perks; more workweek volatility). Finally, and this the most important, the report comes before back to school and those weird Black Friday in the summer deals kick into gear, and does little to foster confidence in scooping up beaten down retail stocks (or continuing to ride relative winners).

These are a few of the comments I expressed to Decoding Wall St. (www.decodingwallst.com) clients:

• Food and beverage and grocery store sales flat month/month: Although this is not a precise measure, mentally strip out organic grocers that are share gainers and traditional grocers are having to compete more on price to convert the traffic they are receiving, with total sales not being robust by any means. See the SuperValu (NYSE: SVU) earnings disaster as a basic template.
• Clothing and accessories sales only higher by 0.1% month/month: No big positive considering retailers have ramped promotions in the second quarter. Is first markdown enough to make the sale? If not, we could be sitting on a powder keg of earnings warnings from the sector at the start of August (the stock chart on Macy's is of interest on this topic).
• Furniture and home furnishings sales -0.7% month/month: Does nothing to alleviate the market's concerns on slowing sales and earnings trends at mattress players, for example Tempur Pedic (NYSE: TPX). Moreover, I think the numbers fit well with the increased promotions offered by Wall Street darling Pier One (NYSE: PIR) in recent weeks.
• Electronics and appliance sales -0.7% month/month: See the earnings warning from HH Gregg (NYSE: HGG) last week. Best Buy (NYSE: BBY) and Whirlpool (NYSE: WHR), in light of all this new news, could be poised to announce very sluggish top line and margin quarters (more so Whirlpool given its European and China exposure).
• Building materials sales -1.6% month/month: With two months in a row of weakening sales in this category, I have concern regarding the quarters from Home Depot (NYSE: HD) and Lowe's (NYSE: LOW). Note that each company had softer sales near the end of the first quarter. I believe there could be some weather related payback in the second quarter, plus the negative effect of drought conditions.
• Sporting Goods sales -1.6% month to month: Is the Nike (NYSE: NKE) earnings disappointment scalable to investment theses on similar names? Under Armour (NYSE: UA) shares have fallen down a water slide as of late.

I continue to be negative on the retail sector (original call on television from April) and hold a bias on recommending short ideas for our Decoding Wall St. equities portfolio.

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