Why retail may not be the best buy

Consumers remain reluctant to spend as holiday shopping season hits full swing.

By The Fiscal Times Dec 14, 2011 1:02PM
Best BuyBy Suzanne McGee, The Fiscal Times

For all those who got caught up in the excitement over robust Black Friday sales, the release of the actual retail sales data for November was like an icy shower. The disappointing numbers serve as a reminder that putting money into the retail industry at this juncture is about as risky as strolling through a minefield.

Economists had been expecting retail sales to gain 0.5% to 0.6% last month, roughly the same as the upwardly revised 0.6% advance recorded in October. Instead, sales grew only 0.2%. Some retailers fared better than others, with electronics outlets seeing a 2.1% jump as consumers stocked up on gizmos for the holiday season. But even then, higher sales don’t always translate into higher margins, as illustrated by the earnings results from Best Buy (BBY) for the quarter ended Nov. 26. The Minnesota chain’s net income fell 29% for the quarter year-over year, while margins contracted nearly a full percentage point to 24.2%.

The problem? Consumers remain ferocious bargain hunters. A lot of the sales recorded during the post-Thanksgiving kickoff were products whose prices had been slashed to lure customers through the door. But shoppers remain averse to spending full price on anything. Moreover, as Bank of America Merrill Lynch economist Michelle Meyer pointed out in a report to clients published Tuesday morning, consumers shopping for the holidays will cut spending on other things, whether it’s a haircut or a night out at the movies. That’s going to deliver a blow to the services industry in particular, which is bad news for overall consumer spending. As Meyer points out, services account for two-thirds of the "consumer basket."

True, consumer confidence is high and unemployment rates seem to be falling. But the question remains: Where is the money going to come from for consumers to become big spenders in December, much less in the New Year? Wages and salaries are nearly stagnant, and it's no longer possible for home owners to use their property as a kind of ATM machine. Then there’s the prospect that the payroll tax holiday won’t be extended.

It’s too early to draw sweeping conclusions about the holiday season's shopping trends. There are still nearly two weeks left to go, in which time anything could happen. But retailers are still showcasing their bargains, an indication that they feel the need to persuade customers to open their wallets. And when December ends, what is likely to be a very difficult 2012 dawns. Shoppers will have to battle everything from depleted savings and tight credit availability to a lack of wage growth. There also looms the possibility that events in Europe could deal a death blow to global economic growth for 2012.

So the disappointing sales data for November aren’t just a historical record of what happened last month, but a sharp reminder of all the headwinds this sector must confront. Think of the news as a kind of foghorn, trying to stop investors from sending their portfolios onto the rocks. Stocks like Best Buy (which plunged 15.5% Tuesday in the wake of the earnings news) may look like great bargains, but buyers might be better off looking for discounts elsewhere.

Related Links:
Should Mighty Walmart Be Regulated Like a Bank?
A Spoiled Kids’ Christmas Story: 10 Priciest Toys
Black Friday’s Big Winners: Online Merchants



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