The Retail Sector’s Recent Woes Are About To Get Even Worse

From Tony Sagami: The Federal Reserve Bank has access to more economic data than anybody, and it is very optimistic about the economy.

The Atlanta Federal Reserve Bank recently forecast that the U.S. economy will grow at an annualized 0.5% rate in the first quarter.

That’s pathetic. But even that discouraging forecast may turn out to be too optimistic if the collapse in consumer spending is the canary in the stock-market coal mine. Here’s what I’m talking about.

The Commerce Department just reported that retail sales dropped in March, a follow-up to a similar decline in February.

And you can tell by the number of retail stores that are shutting down that this spending slowdown isn’t a survey aberration. Indeed, many of the most popular chain stores in the U.S. — Sears, JC Penney, Macy’s, Payless Shoe Source, Sports Authority, American Eagle, RadioShack and many others — are closing all or some of their stores at a record pace this year.

Other names you might recognize: Bebe, Abercrombie & Fitch, Aeropostale, American Apparel, BCBG, Barnes & Noble, Casual Adventure, Children’s Place, Crocs, Gamestop, Hhgregg, Kemp Mill Music, Kenneth Cole, The Limited, Office Depot, Ralph Lauren, Kmart, Staples, and Wet Seal.

Through the first quarter of 2017, retailers have announced they will be closing almost 3,000 stores. For perspective, that is way above the 1,153 for the same time last year and even more than during the Financial Crisis of 2008-2009.

An analyst at Credit Suisse estimates that total store closures will exceed 8,000 by the end of the year; way above the previous peak in 2008 of 6,200.

Not only are stores closing, but many are filing for bankruptcy, including Payless Shoe Source, Hhgregg, Gordmans Stores, Gander Mountain, and Radio Shack.

According to Labor Department data, 60,000 retail jobs have disappeared in the last two months; 29,700 jobs in March and 30,900 in February. That is the worst two-month period of retail job losses since the 2008-2009 recession.

Gee, another coincidence with 2008-2009!

Now mind you, all my bullish friends wave this off as a shift to online shopping. I disagree. And here’s why:

Consider what is happening to new-car sales and Harley-Davidson motorcycles, neither of which are bought online in any meaningful way.

New-Car Registrations Plunge: Forget about what Detroit or what car dealers tell you. The proof-positive statistic that shows the health (or lack thereof) is new-car registrations. As the accompanying chart clearly shows, the number of new cars hitting the road has decelerated to a level that has historically been associated with recession.

Harley-Davidson Hairball: Harley-Davidson is as American as apple pie, and it has seldom had to offer rebates of up to $1,000 to lure buyers into its showrooms. The reason for the incentives is simple: Inventory is backing up at dealers’ showrooms.

Moreover, Harley-Davidson reported its Q1 results last week:

  • The number of motorcycles shipped in the first 90 days of 2017 dropped by 14.7% compared with the same period last year,
  • The average selling price per motorcycle dropped by $342 to $15,526 in the first quarter,
  • Year-over-year profits collapsed by 25.6% to $186.37 million, or $1.05 per share.

And that is after an aggressive stock buyback program (financed by debt) that reduced overall share count by 4%. Without that share buyback, EPS would have been even uglier.

The Consumer Who Won’t Spend

Some will disagree, but it is obvious to me that American retailers are in trouble and that the problem is not Amazon or the Internet.

The problem is American consumers who just aren’t spending.

There are five ETFs that invest in retail stocks that I think you should avoid. More importantly, I believe it is a mistake to ignore the big-picture message the retailing woes are telling us.

What big picture is that?

That 70% of U.S. GDP is consumer spending and all the above retailer woes are solid evidence that our economy isn’t as rosy as Wall Street wants you to believe.

The SPDR S&P Retail ETF (NYSE:XRT) was unchanged in premarket trading Wednesday. Year-to-date, XRT has declined -2.18%, versus a 6.72% rise in the benchmark S&P 500 index during the same period.

XRT currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #33 of 45 ETFs in the Consumer-Focused ETFs category.

This article is brought to you courtesy of Money And Markets.

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