Zacks.com: Analyst Blog

Gloomy, weak, dismal, soft, disappointing, and listless were some of the adjectives used to describe retail sales over the holidays. Even so, it wasn’t a surprise that December retail sales were bad.



Most of the articles that I’ve read this morning are looking for reasons why sales were bad. Zacks.com readers were already aware of many of these reasons going back to last summer. Consumers simply have less money to spend on discretionary purchases. For the last several years, Americans have relied on mortgage equity withdrawals to finance as large part of their lifestyles. When house prices were climbing, there was additional equity to pull out of those homes. That equity was used to buy new cars, big-screen TVs, furniture, clothes, and vacations. That is certainly not the case today.



Enough rehashing of what we already know. There are two questions investors need to ask right now: Do retailer stock prices already reflect all of the grim news in the economy? When will conditions improve and people start spending again?



I think we are close to a point where retailer stock prices reflect the negative economic conditions. Look at this sample of one-year returns:

Could these stocks fall further? Sure. Individual stocks could see further declines, especially if there is any weakness in job or wage growth. For the most part, however, I think much of the downside risk has been realized in many retail names.



Does that mean it is time to be a contrarian and start buying the retail sector in the face of the weak data? Buying retailers here should work for a trade, but this is not THE bottom for the retail sector. While many of these stocks may stop going down on weekly basis, there are no catalysts that point to consumer discretionary spending ticking up in the short term. There will need to be significant structural improvements in housing and the credit markets before the consumer spending environment improves.



While waiting for economic conditions to improve, retailers can help themselves by scrapping plans to open new stores, close their worst-performing stores, and reduce their overall retail selling space. At the same time, retailers will have to put more of their focus on inventory management to limit the number of markdowns that have to take when full-priced merchandise doesn’t sell. Bottom-line, when retailers begin reducing square footage en masse, that will be the time to start buying the retail sector.



Read the full analyst report on JCP.



Read the full analyst report on CHIC.



Read the full analyst report on DDS.