It was no surprise to see last Friday’s newscasts feature the rather desperate, ‘running of the bulls’ scenes, as herds of bargain-hungry consumers bulldozed into stores in search of hot deals. And boy, the US economy could certainly use the sales stimulation.
In contrast to consumers’ zest, the economy isn’t bulldozing anything… it’s staggering through a recession instead – one that started a year ago, according to the National Bureau of Economic Research. The group says employment and income peaked in December 2007, with sales topping out in June. It said the deteriorating job market is a key cause of the recession, as the US shed 1.2 million jobs through the first ten months of 2008 – with 325,000 more layoffs projected for November.
So what does that mean for the already beleaguered retail sector this season – and are there any firms that could prosper? Here are a couple to consider…
Tis the season to… well, spend. And in a credit-oriented nation, Americans again proved that they do that better than the rest. The National Retail Federation (NRF) says 172 million consumers hit the malls or logged on to buy goods over the extended Thanksgiving weekend – a 17% jump from the same period in 2007. And ShopperTrak says ‘Black Friday’ sales rose 3% to $10.6 billion over Black Friday 2007, with the average consumer spending $372 – up 7.2% from a year ago.
Granted, a 3% sales rise isn’t spectacular, but it’s not terrible for a nation with a pathetic savings rate, a 3.7% year-on-year inflation rate in October, and 1.2 million job losses. I’m sure America’s battered banks are wondering exactly where these guys are getting their money from – and whether they can pay it back.
Retailers are doing their best to help – and potentially at their own expense…
The retail sector’s vicious cycle
Many still predict a rough time for retailers, with the NRF predicting a measly 2.2% rise in holiday shopping sales – the lowest since 2002. Retailers are compelled to offer eye-popping deals to cash-strapped consumers, but they can’t sustain the bargains forever, for risk of eroding their profit margins too much. That could result in flat sales and profit growth, with some analysts suggesting that it could also lead to more bankruptcies, following electronics giant Circuit City, Linens n’ Things, and The Sharper Image. In turn, that could drive unemployment even higher.
Already, a major online trend is providing some clues…
When high traffic meets falling sales
The good news: online traffic on ‘Cyber Monday’ (the Monday following Thanksgiving, which traditionally kicks off the online shopping season) climbed by 10% over the same day in 2007, according to Pricegrabber.com. Other firms have also reported heavy activity, with Target (NYSE:TGT) expecting its web traffic to jump 40% this season.
The bad news: Online research firm comScore says web sales are down 4% so far this season and will remain the same as last year throughout November and December. That’s prime evidence that deep discounts could squash profit margins. But essentially, retailers have little choice.
But what choices do investors have?
‘It’s Wal-Mart time’
A few weeks ago, my colleague Marc Lichtenfeld gave you three companies that could be set to buck the gloomy retail trend this season.
One of them was sector bellwether Wal-Mart (NYSE:WMT), whose CEO Lee Scott proudly proclaims, “It’s Wal-Mart time. This is the kind of environment that Sam Walton built this company for.” He’s right. As consumers go all-out to dig up value, Wal-Mart is among those discount-oriented firms set up to not only weather this season’s storm, but to profit from it.
Check out Marc’s article for more details, plus his thoughts on Kohl’s (NYSE:KSS) and Dollar Tree (Nasdaq:DLTR). I’m going to throw another one into the mix – The TJX Companies (NYSE:TJX) – a company I actually highlighted here a year ago…
The outlook for TJX
At the time, the stock traded around $28.50 and bounced to $32 by early February 2008, followed by a 52-week high of $37.52 in August.
Since then, however, shares have sunk back to the $20 area, due to the negative exchange rate impact of the US dollar (the company also operates overseas, including Britain and Ireland), plus the crumbling economy and stock market.
Despite this, though, the firm reported a 4% and 3% sales rise in August and September respectively, compared with August-September 2007. That’s a testament to its business model – the company offers fashionable, quality goods (some of which it buys from other higher-end retailers’ excess inventory) at attractive prices.
However, total third-quarter profit came in at $235.8 million ($0.54 per share), compared with $249.5 million ($0.54 per share) in Q3 2007 – a 5.5% drop, due to the negative economic climate and an exchange rate hit. Over the first nine months of 2008, though, TJX earned $629.9 million ($1.42 per share) over the $470.6 million ($1.00 per share) from January-September 2007.
TJX pegs fourth quarter EPS between $0.58 and $0.62 – lower than the $0.67 in Q4 2007 and the $0.72 estimates, but $2.07 to $2.11 per share in fiscal 2009, compared with $1.68 for this year. And even in this tough environment, the company can still afford to pay a $0.44 (1.9%) annual per share dividend.
Also, the company’s TJ Maxx and Marshall’s stores could be prominent destinations for bargain-hunting shoppers this season. The fact that The Gap (NYSE:GPS) posted better-than-expected third-quarter results could bode well for TJX. Other positive factors include the US dollar strengthening a little and Card Activation Technologies settling its litigation against TJX.
Ultimately, fourth-quarter retail earnings will tell the full story of this holiday period. And while the overall gloom shrouding the retail sector could drag successful, bargain-oriented companies down with the pack in the short term, provided their business models lure in discount-hungry consumers this season, they could end up having the final word.
• This article was written by Martin Denholm for the Smart Profits Report