Thursday, September 3, 2009

Brief Thougths on Retail

Most retailers by now have reported their SSS for August. I like watching this stat for two reasons. One, it appears frequently (monthly) and it is widely reported.

Two, it is one of the least adulterated business activity stats that are available out there. It is unfortunate that the nation's largest retailer stopped reporting them monthly earlier this year just as theirs started turning negative. Surely a pure coincidence.

Retailers in September will start to lap some of their toughest comps vs. last year, and I think how the SSS come in September, October, November and December will be a good indicator of what is actually happening on the consumer side of the economy (widely estimated to be at ~70% of GDP). The bottom started falling off for many mid-priced retailers in the fall, and I would be concerned if we keep seeing double-digit decreases. Luxury retail started sinking on a SSS basis earlier on '08 and most, it seems, are past their worst SSS declines (i.e. Saks, Nieman are no longer at negative 25%+ comp).

Of course, SSS is just one piece of information in the paysage. A sale does not mean a profitable sale, let alone a sale profitable enough to earn a proper return on capital. Retail sales figures can be inflated by running major sales events that can be disastrous in many ways: not earning a good return on capital, pulling demand forward and damaging the brand equity. On the other hand, retail sales are almost always "real": the cash actually changes hands. There are very few retailers (Target, Nordstrom) that still have credit risk because of they have their own credit card operations; most others have farmed out the branded credit cards to the likes of GE Consumer Finance, BofA and JPM Chase. Retailers cannot engage in "stuffing" the channel, "bill and hold" and other tricks.

More specifically, looking at the data that came out over the last two days, I can see that in apparel/department only ARO, BKE, ROSS, TJX and CTR are positive, while all others are negative. Leading the way, ANF- everyone's a hater now- with a drop of 29% and APP accelerating down to 20%. Have both lost their cool? May be.

What is more interesting, August is back to school month, and with all the sales incentives going on (discounts, sales tax holidays, and such), the picture is largely negative. This is not an encouraging sign for the green shoots believers. And the unemployment data keeps getting revised unfavorably. There is also an interesting story about layaways at KMart with...back to school supplies. The big three in the office space (SPLS, OMX and ODP) do not report monthly as far as I know.

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