Retail Sales Bomb

April retail sales were expected to be weak, and excuses like an early Easter and bad weather were lined up in advance. The big surprise, however, was to the downside. April was a disaster for most retailers:

“Though they may have crossed their fingers for an upside surprise here and there, investors knew — and priced into the stocks — that the sorry combination of poor weather, an early Easter, and tough year-over-year comparisons would spell trouble for the final tab of same-store sales numbers in April…

“With more than three-quarters of retailers reporting to Thomson Financial, 86% of them missed expectations for same-store sales, the industry’s benchmark for growth measured by receipts rung up at stores open longer than a year.

“Thomson Financial’s Jharonne Martis warned investors not to take the month’s results to heart, urging them instead to combine March and April — what some analysts call ‘Mapril’ — for a clearer picture of how consumers are spending.

“‘April’s negative (results) are not necessarily an indication that consumers are not spending or that the economy is going down,’ she said. ‘They are simply the result of the shift in the Easter calendar.’

• Wal-Mart posted a 4.6% decline, rather than the 1.1% drop expected
• Target’s same-store sales dropped 6.1%
• Gap stores’ results were a big blow to investors, plunging 16%, more than double the minus 7.1% estimate at Thomson Financial
• Banana Republic’s sales were down 13% — a big miss from the 1% decline expected
• American Eagle was forecast to ring up a 1.3% gain in same-stores sales. Instead, the teen-wear retailer turned in an eye-popping 10% drop in comparable-store sales, blaming all the expected factors of weather, calendar shifts and comparisons
• Pacific Sunwear of California same-store sales dropped 16.5%, far deeper than the minus 6.5% expected at Thomson Financial
• Limited Brands Inc. parent of Limited, Express, Victoria’s Secret, and Bath & Body Works reported that same-store sales fell 1%, rather than the forecast 1% gain
• bebe Stores, the trendy apparel and accessories retailer for young women, reported same-store sales fell 6.5%
• Chico’s a fashionable apparel and accessories retailer for older women also let down investors with a 7.3% decline in comparable-store sales, vs. the 0.6% dip anticipated.”

Huge Rise in Revolving Credit

It is interesting to note that these retail reports are on the heels of a brisk rise in revolving credit:

“Consumers boosted their borrowing in March at the fastest pace in four months, showing resilience in the face of rising energy prices and a painful housing slump.

“The Federal Reserve’s report, released Monday, showed consumer credit increased at a brisk annual rate of 6.7% in March. That marked a pickup from February’s 2.8% growth rate and was the biggest increase since November…

“Use of revolving credit, primarily credit cards, rose at a sizzling pace of 9.2% in March. That was up from a 2.9% growth rate in February and was the biggest increase since November.”

I talked about revolving credit in “Consumer Spending Soars”:

“This huge increase in revolving debt right in the face of a slowing economy smacks of inability to service current debt. And ability to service debt depends on jobs and rising wages. So what are consumers going to do for an encore, given the slowdown in jobs and wages as discussed in:

• Nonfarm Payrolls vs. Govt. Payrolls
• Birth/Death Model Fatally Flawed
• Layoff Plans Soar?

“Consumers can only postpone the inevitable for so long (and even then, only as long as they have a job). The slowdown in MEW (mortgage equity withdrawal) took away one leg of support, and a slowdown in jobs will take away another. Foreclosures and bankruptcies are now both set to soar.”

Is Easter a Lame Excuse?

If this were just a result of a shift in the Easter calendar, then why were the estimates so far off? Still, every time there is a dip in consumer spending, consumers come roaring back the next month. It remains to be seen if this is an outlier or not, but consumers are clearly stressed.

There is one additional factor in this mess that scarcely anyone has talked about, and that is an overexpansion of stores. We have overcapacity in everything. We do not need more Home Depots, Lowe’s, Wal-Marts, Pizza Huts, or anything. But as long as stores were expanding, jobs were added to the economy, and that kept consumers spending.

Ponzi Expansion Process

• Build new housing subdivisions
• Retail stores follow
• Those stores hire people
• Those stores stock merchandise
• Truckers and shippers are kept busy
• Retail and trucking jobs pick up the slack from the loss of manufacturing jobs.

The flaw in the process above should be obvious. Commercial construction follows residential construction with a lag. The pullback in capital spending suggests that once the buildout of stores now in progress is complete, there will be no driver for jobs going forward.

With any sustained pullback in consumer spending, the massive overcapacity in retail stores will become rudely apparent. Perhaps this is finally it or perhaps not, but eventually, those stores that were busy hiring because of expansion are going to have to start laying people off. All the pieces are in place for one heck of a nasty consumer-led recession. Unfortunately, few are prepared for it.

Regards,
Mike Shedlock ~ “Mish”

May 10, 2007