Retail Sales Most likely To Disappoint!

They Had A Sale, But Nobody Came!

The elephant in the room that both bulls and the media appear reluctant and unexcited to talk about is retail sales during this rather short holiday season. The number of shopping days between Thanksgiving day and Christmas has in the past been talked about as a big deal, but not this year. Instead they continue to throw out claims of fast growth during the third quarter where the GDP surged to 5%. This was not consumer driven, but the result of a 10% jump in federal spending, mostly on Pentagon hardware. This "pre-election" spending was the biggest increase in federal spending since 2009 when the Obama administration put in place a huge economic stimulus package.  Reports from the local malls and surrounding stores on the morning of Black Friday indicated problems from the start.  

Not only were the parking lots empty but many of the stores had more employees working than customers. My office is across from the second largest mall in my state so as I went into work an unplanned visit seemed in order. Foot traffic inside the mall was far less than I imagined, most of the shoppers were younger women and older girls. These are considered the "core" and most diehard of shoppers. Many were carrying few if any bags, this indicates little in the way of buying. Animal spirits in reaction to Black Friday were far less enthusiastic than in the past. The stores did fill as the day wore on but reports that were more or less ignored showed a drop in sales of about 11%. It now appears the lack of enthusiasm displayed in the days leading up to the holiday have leached into post holiday sales. This will have a huge impact on sales as well as margins as retailers are forced to slash and discount goods to clear shelves for spring merchandise.

I walked the entire mall several times in recent weeks to gauge shopping activity and see for myself what was happening, I have decided to rate sales dismal at best. As usual the media presented stories on the news of robust shopping, this includes scuffles in stores in the UK. In reality what happens in one store matters not, it is what is taking place in a majority of  this country's retail locations that will determine whether this Christmas season is a boom or a bust. We are repeatedly told by the media of America's changing buying habits, about the massive shift to online buying from a lazy public seeking convenience. Add to this stories about how the malls are dying and failing to attract shoppers who need a compelling draw to wow them and not just run of the mill goods and services. Personally, I think the shift in how people buy is all a bit more complicated than that.

 In recent weeks the crowing about strong sales has ebbed and speculation as to whether this has been a big shift to online buying or if the consumer has simply gone AWOL (absent without leave). Despite large sale promotions and steep discounting activity on the sales floor in stores across much of America has been rather quite. Stories instead focus on stock market gains and lower gas prices being the spark that will ignite the animal spirits of consumers. Almost two years ago in a television interview on Bloomberg, Harvard economist Steven Roach put a retail sales consultant in her place who was crowing about strong retail growth.  Roach pointed out that after discounting for inflation growth in retail sales compared to past years is mostly an illusion. His statement remains true today. While the media continues to pump out the message all is well and the economy is growing it is hard to overlook the fact that consumers are not enthusiastic.

Interestingly, this is all occurring at a time the government continues to pour out billions of dollars each month in student loans, many of these loans will never be repaid. This is in a way a stealth "stimulus" package that proves we are on the wrong path. The chart below lends credence to the idea that as the Fed's credit injection is reduced someone must assume their role or consumption will fall. If you take away student and car loans the remaining credit creation is not nearly enough to push US consumption higher.

It appears the credit card buying spree from late spring is long gone and revolving credit has fallen a considerable amount. Comparing the recent "recovery" period to the "healthy" credit card purchasing days of 2007 confirms this weakness. It is very troubling that after several months of depository institutions and banks funding the bulk of credit needs, the past two months have reverted to the old normal, where Uncle Sam is the sole provider of consumer credit. This is only one of many problems facing brick and mortar stores that now have to deal with online competition.

I have written several articles about Amazon and how the online retailer often abuses and exploits the brick and mortar stores that line streets throughout America. I was unhappy when Washington failed to force the collection of sales tax by online companies. This was supported by real estate owners and most business owner because it gives online retailers an unfair advantage. While Amazon sends out the signal that their customers are smart, forward thinking, and upscale the company exploits America. What consumers save in money it may cost them many times over in damage to their local business community. Words like "evolving" have been used to describe Amazon's business model, a better word might be undefined. A major key weakness is that new competition can now cheaply and easily replicate the most profitable parts of Amazon and cherry pick much of their future potential. This may be the year that competition has struck back hitting Amazon head on in a game Amazon cannot win.

Another issue is what consumers are buying continues. Recently we are witnessing a shift from general consumer goods to more purchases of autos and healthcare. Far to much has been made of auto sales and how they create jobs as well as the positive affect of Obamacare during recent months. It can be argued that these so called economic drivers have major flaws. In the case of auto sales 31% are currently underwritten by sub-prime loans that leave the buyer even more strapped and deeper in debt, when it comes to healthcare, major increases in premiums due to Obamacare are smashing into the budgets of many Americans. Both these factors leave the consumer with far less disposable income. If indeed auto sales are roaring up double digits at the same time healthcare spending has increased substantially it is only fair to assume most small businesses or someone else is taking a beating.

The market should be very concerned that no retailers are coming out boasting of great holiday sales. It is possible that a combination of many consumers simply being "tapped out" and with their closets full are finally learning to live with less and are unenthusiastic about buying more. As for online shopping we should remember some of the things that will effect their sales and bottom-line. Many of the poor lack a "good credit card" and as brick and mortar retailers cut prices to move merchandise, online companies like Amazon will be forced to do the same. This will squeeze margins and profits. Many of the big box stores have beefed up online sales and services with the advantage of allowing customer pick up and returns that companies dealing only with online cannot provide.  All in all expect this years retail sales to be OK at best to very disappointing or unimpressive, and profits are likely to be the same or worse.