Optimistic investors have pushed retail stocks up in recent weeks. 30% of Americans are expected to spend those rebate checks, while another 40% will use them to pay down credit-card bills, which in turn could prompt more spending soon. While consumers are starting to conserve cash, they’re a lagging indicator, which means their effect on financial markets has already been discounted long before actual spending decreases occur at the household level.
It’s true consumers are starting to cut back discretionary spending, but especially in bad times we all need a little pick-me-up now and then. People won’t stop buying the little extras completely, but they may buy them at a discount retailer. Many are calling for investment in discount retailers so stocks like Dollar Tree (DLTR) and Family Dollar Stores (FDO) may see some action. But don’t be too quick on the draw. Make sure you’re buying a strong management team who can weather the storm. Other things being equal, all retailers to all income strata face inflationary production costs from Chinese factories. Classical wisdom is that during hard economic times, it’s the mid-level retailers who lose. High-end retailers do okay because their clientele (the top 10% of the population, measured by wealth) is less affected by downturns. It is the mid-market retailer that gets hit by the middle class. Low-end retailers sacrifice higher margins for traffic. Strapped mid-level consumers move into the lower end stores. This is especially true now that shopping in down-market stores for food and basic necessities has become acceptable. The market overall could gain on the relatively good news in the retail sector. Strong numbers posted May 30 by a diverse selection of retailers form Shoe Carnival to Tiffany help to support the argument against recession and support an upturn in the economy. Many believe that retailers haven’t seen an environment this challenging in over fifteen years. Consumers’ value-conscious attitude isn’t going to change significantly any time soon.
Written by Lela Davidson
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