The retail sector of the economy acts as a gauge of consumer spending. When the retail sector shows weakness, it means consumer spending isn’t as strong. If that becomes the case, economists assume the U.S. economy will perform poorly since consumer spending makes up about two-thirds of U.S. gross domestic product (GDP).
As it stands, the retail sector is showing weakness and providing troubling news on consumer spending. According to Thomson Reuters, sales at retail stores open for at least a year increased a dismal 3.9% in July, below the analyst expectation of a rise of 4.4%. (Source: Reuters, August 8, 2013.)
A well-known name in the retail sector, Gap Inc. (NYSE/GAP), registered an increase of one percent in July same-store sales from July 2012. Analysts were expecting an increase of 1.7%.
Costco Wholesale Corp. (NASDAQ/COST) said its July same-store sales increased four percent from July 2012; analysts were expecting a rise of 5.1%. The company also stated that consumers are shying away from buying big-ticket items such as electronics.
In July, American Eagle Outfitters (NYSE/AEO) reported a decline of seven percent in its quarterly same-store sales, again compared to July 2012.
What’s even more troubling…to get those sales in July going, the retail sector had to offer deep discounts to customers.
July usually kicks of the back- to-school shopping season and gives us an idea of howconsumer spending going into the fall season looks. After the holiday shopping season, the back-to-school season is the second busiest for the retail sector.
As it stands, the National Retail Federation (NRF) is already expecting lower spending in the retail sector on back-to-school goods this year. This trade association expects families with school-age children to spend $634.78 this back-to-school shopping season compared to $688.62 last year—a decline of almost eight percent. (Source: National Retail Federation, July 18, 2013.)
My question; how long can the optimism in retail stocks last while demand in the retail sector from consumers is falling? Sooner rather than later, the irrationality between the prices of retail stocks and what their growth prospects are will meet an unpleasant reality. By Michael Lombardi, for Profit Confidential
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