Investors have piled back into retail stocks, with many names up 50 percent or more since the latest rally began in early March. Does that mean things are starting to look up at the mall?
Not a chance, said Howard Davidowitz of Davidowitz & Associates, a retail-consulting and investment-banking firm.
“I see no cause for optimism,” Davidowitz said. “We’re losing 500,000 to 700,000 jobs a month. That hasn’t changed.”
Today’s jobless-claims report and projection by the Congressional Budget Office that unemployment will top 10 percent next yearunderscored that point.
The recent rally in retail stocks is simply traders taking advantage of low valuations to make a quick buck, Davidowitz said. A company reports “less bad” news, traders pile in. The CEO says the outlook is still gloomy—and, they hit the SELL button.
When you look at the fundamentals, Davidowitz says emphatically, there are no signs of improvement.
“The American consumer is scared out of their wits — saving more and spending less. Store-for-store sales are terrible,” Davidowitz said.
“Every single department store in America is in the sewer,” he said, noting that same-store sales at Saks, Neiman Marcus, JCPenney—right down the line—are all down more than 30 percent. Ditto for specialty retailers like Gap and Abercrombie & Fitch.
Aside from the average consumer being scared into saving, the bottom fell out of the luxury bucket as well: People who work(ed) in financial services and commercial real estate were the biggest luxury buyers and both of those industries have been decimated, Davidowitz said.
“The luxury business is going to be a shadow of its former self … half the size it is now in five years,” he explained.
And, there are still more shoes to drop — like commercial real estate — he warned.
As a result, Wal-Mart continues to report more affluent customers coming to its stores.
Davidowitz's only picks in the sector — for the foreseeable future — are companies like Wal-Mart that offer a good value and those with a wide range of consumer staples.
The picks include Family Dollar, Dollar Tree, Ross Stores, TJX, McDonald’s and CVS.
He also sees some signs of encouragement in companies like Target and Costco , which started with higher levels of discretionary items than their competitors but have done a good job managing the situation to increase the amount of staples the offer and cut back on discretionary items.
The scariest part is that this shift in consumer spending isn’t temporary. The recession has permanently changed the way consumers consume.
“The American consumer will never be the same,” Davidowitz said. “We are indefinitely in for a lower standard of living,” he said.
When we spoke to Howard in January 2008, he declared consumer discretionary spending D.O.A., dead on arrival. He stands by that position a year and a half later.
“Things have changed forever,” he said.
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