Grim Reaper Visits Retail

The drumbeat of bad economic news continues.  Friday morning it was announced that US nominal retail sales fell 2.8% (seasonally adjusted) in October from September, and are down 4.1% from a year ago.  The results were sharply lower than the 2.1% decline expected by the consensus of economists who forecast such data.

Keeping in mind that these are nominal numbers, when you factor-in inflation the picture gets much uglier.  Also, when looking at the year-over-year numbers recall that the population grows at about 1.0% per year.  The monthly decline is the worst since the government started keeping these records back in 1947.  The next worst was a 2.65% decline in November of 2001.

If you recall, back then people stayed away from the mall because they thought they would be blown up if they went shopping.  Sort of puts the current decline in perspective.  The credit market freeze up has frightened away Banana Republic shoppers for fears that we may indeed be in a “banana republic.”

The decline follows a 1.3% fall in September and is the fourth month in a row of declining retail sales.  I hate to say that it can’t get much worse than this, because it most likely will.  This will be the weakest Christmas in the lifetime of just about anyone not currently residing in a nursing home.  A recent survey indicated that shoppers plan to spend 50% less this year than last year.  The survey has been taken every year since 1985, and the previous worst indication was a 6% decline in both 2005 and 2003.

The worst hit area was Autos, and the woes of General Motors (GM) and Ford (F) are well known.  However, they are now at the point where it seems very likely that GM will go Chapter 11 very shortly unless it gets a government bailout.  That has the potential to throw literally millions more out of work, something that would cause shoppers to stay away in droves.

Auto and auto parts sales were down 6.2% on the month and 25.6% year over year.  However, even excluding autos, overall sales were down 2.2% (-1.2% was expected) and were up just 1.0% year over year.  The other very weak area was gas stations, as pump prices plunged.  Sales there fell 12.7% on the month and were up 0.4% year over year.

However, the weakness was widespread, with furniture sales down 2.5% on the month and down 13.5% year over year, electronics were down 2.3% and -5.6%, respectively, and department stores down 1.3% and 6.9%, respectively.

If you need retail exposure in your portfolio, stay with safe plays like the supermarkets such as Kroger’s (KR) and Safeway (SWY).  There are a few select specialty stores that might do OK, like GameStop (GME), which gets much better margins on its used game business than on new games, and used games might become a popular Christmas gift this year.

Stay far away from the mid-level department stores like J.C. Penney (JCP), Macy’s (M), Target (TGT), Kohl’s (KSS), Dillard’s (DDS) and Sears Holdings (SHLD).  Also avoid specialty apparel type stores like Abercrombie & Fitch (ANF), the Limited (LTD) and the Gap (GPS).

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