Retail Sector In Status Quo

By Kristin Graham | September 07, 2009 AAA

Well, it looks like things remain unchanged on the retail front. For the twelfth consecutive month in a row, same store sales reported yesterday fell again. This time, the damage was a 2.9% drop. And while that's better than analyst expectations, it indicates that retailers are still dealing with budget conscious consumers.

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Remember When...
You have to dig deep in your memory to remember back to the good ol' days when retail sales were on fire. It sure has been quite a while since the overall retail sector has posted a solid month of same store sales. Because of this, many analysts are starting to get antsy to see good numbers. (Refer to our Retail Sale Report Tutorial to learn more about this economic indicator.)

For example, the rallying of retail stocks since the beginning of the year signals that many investors are optimistic of what's to come from the sector. And browsing through the news, many media publications are offering some sugar-coated analysis concerning the depressing comps figures.

Some alluded to the "cash for clunkers" being a reason for slower sales, suggesting that the government's promotion diverted consumers from their regular retail spending habits. Others focused on the fact that last month's sales were better than expectations, and suggested that things seem to be starting to improve. However, the bottom line here is that August is an important month with back-to-school shopping, and the comps decline simply means that that consumers remain reluctant to spend. Frugal is still in.

A Permanent Change?
The retail landscape is undoubtedly changing. Perhaps when the economy finally begins to boom again, some shoppers will revert to their old "spending money they don't have" ways. But for now, consumers are still scarred from being hit hard in this recession, and I am pretty confident that most will not likely be reverting to their irresponsible habits any time soon.

The individual store results provide the evidence. Big discounters that usually draw crowds, like Costco (Nasdaq:COST) and Fred's (NYSE:FRED), are still reporting slightly negative comps. Specialty retailers like Zumiez (Nasdaq:ZUMZ) and Children's Place (Nasdaq:PLCE) posted near double-digit drops during a month when most parents are flocking to the mall for clothes. And even the wealthy are showing resistance to spending as higher end Nordstrom (Nasdaq:JWN) comps fell 7.6%. No specific segment has shown any signs of recovery yet. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)

How to Play the Sector
Generally speaking, I don't advocate putting money into retailers right now. The sector's rally over the last few months has left most companies far overvalued - particularly ones that don't even operate sound business models or sell long lasting brands. I personally don't expect the sector to experience recovery any time soon, and another weak upcoming holiday season will eventually deflate the majority of retail stock prices.

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