The Gas Crisis Is Fueling Slow Retail Sales
Thursday, August 07, 2008SUZANNE PRATT: Discounters continue to dominate the retail picture. July same store sales were weak as consumers spent cautiously and the stimulus checks dried up. Sales at the nation's largest retailer, Wal-Mart, rose 3 percent in July, but that was just shy of analyst expectations. Rival Target posted a wider than expected sales drop of just over 1 percent. Discount warehouse clubs like Costco and BJ's Wholesale had double-digit sales gains. But clothing retailers and department stores were hit hard. Sales at Gap fell 11 percent. JCPenney and Kohl's both reported bigger-than-expected drops in sales.
Joining me now for a discussion of those chain store numbers and with his outlook for the retail sector is Brian Tunick. He is a specialty retail analyst at JPMorgan. Brian, welcome.
BRIAN TUNICK, RETAIL ANALYST, JPMORGAN: How are you doing?
PRATT: Let's talk about the July numbers first. What did you make of them?
TUNICK: I mean, I think coming after the June stimulus numbers, which were very strong, I think July was pretty disappointing. But for most of our company, July is more of a clearance month, so it's not exactly the month you want to have good numbers, but I think any signs that people can find about the consumer, they're looking at. And July was the low plan. The good news that the margins were better isn't enough for the stocks right now. There's a lot of fear out there that we're going to continue to decelerate early into 2009.
PRATT: So what does it tell you about back to school? Should we expect to see a sort of grim season there?
TUNICK: Yeah. I think you're seeing the stocks starting to anticipate that. I think a lot of the companies themselves I think are starting to plan. I mean we could see probably one of the worst back to schools in what we think could be 15 years. It's going to be really ugly. It's just a question of how much defense or lean inventories our companies can really plan at. You are not planning to be the hero right now. There's not a lot of dollars being spent. So really it's defense, it's inventory management and it's SG&A expense control right now.
PRATT: Do you expect the trend that we've been seeing in the retail sector of discounters benefiting and everybody else suffering to continue for the foreseeable future?
TUNICK: Yeah, unfortunately. So far in 2008 just the number of bankruptcies that we've seen so far hitting the specialty retail store closings or apparel or discounters is the highest we've seen in 10 years. So if that continues, there's no question there's going to be a lot of inventory benefiting the off-pricers like the TJX's or the Ross Stores of the world and it's probably not a great thing for the specialty retailers that have to compete with those going out of business sale events.
PRATT: So what does this all mean for the holiday season? Is this likely to be as you say about back to school? It's going to be one of the worst holiday seasons that we've seen for awhile as well?
TUNICK: Yeah. I think in the beginning of the year, there was a lot of hope that either the Fed cuts or the stimulus or the fact that this is an election year and the fact that we're facing some easy comparisons from a disappointing holiday last year, would result in some good numbers. But I think these last couple of weeks out there there's been a big change in expectation and I think this is going to be one of the worst holiday seasons from a top line sales growth perspective that we've seen in over 10 years. We're hoping it's not as bad as back to 1991. But basically if the trend continues and the consumer has to feel all of the pressures about energy and food, worrying about their assets both in home and in the stock market. And now we're obviously seeing the employment. It's going to take a lot more than a presidential election I think to give people some confidence. So, it's shaping up so far with this momentum to be ugly and the south side of Wall Street is still looking for 20 percent earnings growth for the back half and almost 20 percent earnings growth for next year. So that's not good. Stocks can't seem to discount all the bad news quite yet.
PRATT: It doesn't sound to me that you would be recommending that investors wade in at any point in to this sector at all.
TUNICK: Yeah, I mean, you really want to have over a 12 to 24 month time horizon to want to buy these stocks. For clients that may be just want to trade falling (ph) oil, maybe they'll get a little balance. But I still think earnings expectations are too high. There's too much uncertainty right now and if you have a three to six-month time horizon, unfortunately I think you're going to still want to stay away. At least let's start talking about holiday and first half of '09 before we have any idea for bottoming. And we've had a great four or five year wealth effect that unfortunately is unraveling right now.
PRATT: OK, I think we have to leave it there. Thank you for joining us this evening.
TUNICK: OK.
PRATT: My guest this evening, Brian Tunick of JPMorgan.
