My Case Against (Most) US Retailers …

In last week’s column, I gave you some ideas on the kind of companies I currently favor … namely those firms that have strong brands, economically-insensitive products, and strong finances that allow healthy dividend payments.

I also said (again) that it was a good time to take money out of more cyclical stocks, particularly those that have run up recently.

Today, I want to focus on one of those particular sectors - consumer discretionary stocks - to give you more of the thinking behind my suggestion. As you’ll see, the fundamentals simply do not yet support putting money to work in these companies, which are predominantly retail chains.

Let’s take a look at those fundamentals right now:

June Retail Sales Show a Continued Slump

According to data released last week, June same-store sales stunk pretty much across the board:

• Mall stalwart Abercrombie & Fitch (ANF) saw sales plummet 32 percent
• Luxury retailer Neiman Marcus’ results fell 20.8 percent
• And even discount chains suffered, with Target’s (TGT) sales dropping 6.2 percent

What about the almighty Wal-Mart (WMT)?

Well, we don’t know because the company stopped reporting its monthly same-store sales in May. Curious, isn’t it?

Even more curious is the fact that all the retailers cited bad weather as a major reason for their poor showings.

That’s one of my favorite excuses in the book!

I’ve heard nearly every conceivable kind of retailer invoke the weather over the years. Heck, I remember an auto repair shop saying rain kept customers away a few years ago.

But the story this time tops ‘em all. The retailers are saying greater-than-average rainfall in the Northeast - and the coldest June in 27 years - put a damper on their sales.

Give me a break, guys!

Couldn’t I argue that the exact opposite is true? That when it’s cold and rainy in the summer, people flock to movie theatres and shopping malls? That they pick up windbreakers, lightweight long pants, and umbrellas? That they go sit at Barnes and Noble and read books and sip lattes?

Really! Let’s stop sugar-coating things and all admit that there are far bigger storm clouds hanging over U.S. retail chains, clouds that are unlikely to clear anytime soon.

I’m talking about the fact that …

Unemployment Is Surging, Credit Is Running Out, Consumers Are Worried, and They’re Spending Less!

As Mike Larson pointed out last week - consumer credit defaults are hitting historic highs.

Meanwhile, credit card companies and other financial institutions are chopping available limits, cancelling dormant lines of credit, and denying new loan applications from even well-qualified candidates.

And of course unemployment is still surging!

No wonder the latest Reuters/University of Michigan consumer sentiment survey - released last Friday - showed the lowest reading of consumer confidence since March (when stocks were hitting new lows).

Survey respondents said they were very worried about an extended economic downturn, job security, and evaporating wealth.

This is precisely why Americans are ratcheting up their savings to prepare for tough times ahead.

The national saving rate surged to 6.9 percent in May, the highest level in 15 years!

This trend is likely to continue. In fact, a 6.9-percent savings rate is roughly equal to the 50-year average saving rate in the U.S. So if people continue to feel uncertain about the future, I’d expect the rate to hit above-average levels, maybe even double-digits.

Gee, does anyone else think maybe all of this has anything to do with the poor retail sales?

I sure do. And while I hate to rain on the retailers’ parade, these long-term trends do not imply a recovery in the sector anytime soon.

Bottom Line: Retailers Are Struggling Just to Stay Alive!

The only way retailers can keep getting people to spend is by bending over backwards and cutting prices.

How many 0 percent financing programs and 50 percent-off sales have been rolled out around the country?

Have you seen the cash-back deals being offered by auto dealers that are still open?

And what about those “lose your job and we’ll make the payments for you” campaigns being used on everything from fridges to cars?

You can bet now is not a fun time to be selling retail goods. And that’s precisely why I suggest you do not sink money into retail stocks right now.

We’ve already seen names like Circuit City fail. Given this very real shift in consumer behavior, I expect others to follow suit.

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