The Latest You Need to Know About the Retail Sector

The retail sector continues to be a pit for trading capital, albeit some of the valuations we are seeing are reasonable and worth a look. The retailers performing the best are the discount and big-box chains. Dollar stores are also doing extremely well. The catalyst behind this is of course the current climate of a recession, declining property wealth, stock market losses, and the fear of job losses. With all of these negative factors in the back of consumers' minds, it is understandable why consumers are not spending, despite the stimulus provided by the government. Interest rates are at zero to 0.25% and rates for mortgages are at record lows, but still it is not enough to get people to open up their wallets to spend. The problem is that, without a strong velocity of money, the economic stimulus plan will not be as effective and the government may have to inject more capital down the road to try to turn around the massive U.S. economy.

For the past year, I have been warning readers about the risk of investing in retail stocks. The holiday season was decent as far as total sales, but retailers had to undertake heavy discounting in order to drive spending and this pressured operating margins.

Here we are just a few weeks away from the spring season and guess what? Shoppers continue to remain tepid and are staying away from purchasing non-essential goods. The reality is that consumers are not lining up at the malls waiting to buy goods. Given the decline in overall material wealth, we are clearly continuing to see a decline in consumer spending.

Consumers are not buying cars or big-ticket items. The impact of this has been evident on the U.S. auto sector, which has been borrowing tens of billions of funds from the government.

The reality is that the current consumer focus remains with buying essentials and those goods necessary to survive. No new cars, appliances, or electronic goods, or splurging on a fancy restaurant. Instead, shoppers are heading to the discounters and wholesale clubs to economize with their money.

Companies like Costco Wholesale Corporation (NASDAQ/COST) and Wal-Mart Stores, Inc. (NYSE/WMT) are benefiting from the thrift spending. In fact, Wal-Mart has seen its key same-store sales data rise when other retailers are seeing negative growth.

Retailers such as those that sell food will continue to perform, as people need to eat. What we could see is shoppers looking at the cheaper big-box supermarkets for cheaper food. Whole Foods Market, Inc. (NASDAQ/WFMI) surged nearly 40% on Thursday after upgrades.

Retailers that sell non-essential goods at regular prices will suffer. My view on the retail sector remains the same. The ripple effect from the housing market may continue to spread unless we see some stability in the credit and housing markets. We are seeing weakness across the board from the discounters to higher-end luxury goods retailers.

My advice is to continue to tread carefully in retail. A long and deep recession will kill retail stocks, although you should also look at buying on extreme weakness with brand-name retail stocks. Sometimes the best time to buy is when there is chaos.

Profit Confidential

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