Where is Santa Claus?

By: Chad Hudson | Thu, Dec 19, 2002
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In what is turning into a weekly occurrence, Wal-Mart along with Federated announced that their sales were on the low end of plan. This week, Target joined the reindeer games. Target's December sales were "well below" expectations. Overall sales increased 1.9% for the week ending December 17 from the previous week according to Bank of Tokyo-Mitsubishi. The lackluster increase is more worrisome considering last week sales were depressed due to winter weather throughout the eastern part of the US. Mike Niemira, economist at Bank of Tokyo, expects November-December same-store sales to rise 2.5% from last year, but believes it could rise only 1.5%, which would be the worse holiday season in over 20 years. The weekly year-over-year same-store sales growth has averaged 3.9% over the past eleven years. Below shows what the average weekly year-over-year growth was in same-store sales for December and the combined November-December period.

Year Dec Nov/Dec
1991 4.3% 4.2%
1992 4.9% 4.6%
1993 4.2% 4.6%
1994 3.3% 3.6%
1995 2.9% 1.7%
1996 3.2% 3.3%
1997 3.4% 3.7%
1998 4.5% 4.5%
1999 6.4% 6.1%
2000 3.2% 4.1%
2001 2.8% 2.2%
2002(thru week ending 12/17) 3.5% 2.5%

The higher growth from last year is helped by the easy comparisons from the weak spending last year. Unless the last couple of weeks in December are horrible, it looks like it will remain in the +2% range. But, considering the weak sales last year, retailers were hoping for much higher sales. In addition to the lower same-store sales gains, there has been widespread discounting to lure customers. While low prices increase sales, it does not bode well for profits.

On Thursday, Fitch Ratings issued a report questioning the strength of a retail recovery next year. Within the press release announcing the report, the following paragraph sums up the situation very well:

"Slow economic growth, combined with continued rapid expansion of retail selling space by the discounters, will keep a lid on comparable store sales increases and make it difficult for the supermarkets and department stores to gain much traction. Sluggish top-line growth will dampen earnings momentum for the industry as the benefit of inventory and expense reductions achieved in 2002 will be difficult to repeat."

It is difficult to get a gauge on consumer spending since most of the bad news coming from retailers is not indicative of aggregate consumer spending. Retailers spent the late 90s aggressively expanding their store base. Now that consumer spending has moderated, retailers are suffering. Best Buy announced its revenues increased 10.4% in the third quarter on a pro-forma basis (pro-forma is including revenues for recently acquired companies in the year-ago results), but same-store-sales actually declined 0.4%. This is happening throughout the retail landscape. I know I've harped on this before, but it is important to realize that these retailers are having disappointing results while consumer spending is still relatively strong. A few retailers are starting to realize that the aggressive growth plans of the past have to be scuttled, however several are actually accelerating store growth. Pier 1 Imports announced it will add 90 stores this year and 115 in 2004. Just last quarter Pier 1 expected to open 90 net new stores in 2004.

During its conference call, Best Buy said sales were strong across consumer electronics, especially in digital products. Digital TVs, digital cameras, and DVD software all saw double-digit gains. On the flip side, appliances saw a double-digit decline along with CDs. While cellular phone sales increased, it was on the strength of prepaid cell phones. The industry would obviously rather sell a phone with a monthly subscription plan than the prepaid variety. Best Buy is also mimicking the macro environment by reducing its capital expenditure budget. Best Buy has reduced its capx budget by 12.5% for the year ending February 2003, from its original $1 billion forecast to $875 million.

Online sales will be another obstacle for retailer to overcome. Online sales hit an all-time record on December 12. The $288 million worth of goods topped the previous record set on the same day last year by 10%. Overall online sales this year are running 23% ahead of last year. Traditional brick-and-mortar retailers have already started experiencing declining same-store-sales due to over-expansion. With online shopping starting to take a bigger slice of the pie, retailers will only see their plight worsen. Not only are online retailers taking a larger slice of the pie, but the internet gives consumers an easy way to price shop, which will lead to shrinking margins.

McDonald's announced it would post its first ever quarterly loss as a public company. The company anticipates losing five or six cents per share this quarter due to expenses relating to the closure of 175 restaurants and job cuts amounting to 31 cents per share. Even excluding these expenses, McDonald's will fall short of the 25 to 26 cent EPS estimate by about a nickel. McDonald's also announced same store sales are down 1.3% through the first two months of the quarter. While this is better than the 1.5% decline McDonald's experienced year-to-date, McDonald's expects December sales will be lower than the first two months of the quarter. Only Latin America is achieving same-store sales growth.

Even though it seemed obvious to everyone except the automakers, GM just announced that sales incentives, mainly zero percent financing, have pulled sales forward and will reduce next year's sales by 400,000 vehicles industry wide. Additionally, two auto retailers lowered earnings forecast for the fourth quarter and for next year during the past week. Last week, Group One cut fourth quarter guidance and on Tuesday, Sonic Automotive reduced fourth quarter guidance by about 22%, and 2003 guidance by 8%.

The commercial real estate market was handed a blow from the credit rating agency Fitch. Fitch said that commercial real estate loan delinquencies should double in 2003, from 1.26% to 2.5%. Areas showing the most weakness are hotel, office, retail and multifamily loans. We have chronicled the weakness in commercial real estate for the past couple of years. Hotels are suffering from the lack of corporate traveling as companies continue to cut expenses. Office real estate has been weak due to the weak employment situation and a widespread oversupply. Multifamily developments have been hurt due to low interest rates encouraging families to buy houses instead of living in apartments. While total retail sales have remained positive, they have suffered on a same-store sales basis. Fitch sees consumer spending declining in 2003, "posing additional stress."

An USA Today survey of 143 new home buyers in the San Francisco Bay Area found a growing number giving up on the stock market and turning to real estate. 27% of the respondents said stock sales were a very important source of their down payment, which is four times the number just a year ago. Perhaps more telling of the budding investment mania is the fact that 20% said their main reason for buys was because they think real estate is a better investment than stocks. One sign that residential real estate in the Bay Area is getting frothy is that 56% of the buyers bought because they feared getting left behind. The article included a few highlights that capture the mindset of these homebuyers. There was a single mother of two that paid 17% over the asking price. She cashed in life insurance policies and borrowed from her 401(k) account. She was quoted saying, "I finally just decided: I need to jump in," and "Home investment is where the earnings are right now." "Better than any stock purchase I made," said another new home buyer after his $500,000 home was appraised for 20% just three months later when he refinanced. Another sign indicating vacation homes in California continue to sell. During the first three-quarters this year, sales are were 6% with the average price soaring 22%.

On the inflation front, the New York Times is raising the price of its paper in the New York area to $1.00 from $0.75. As an amateur writer, I hope my compensation is not based on these weekly commentaries; it was a bit of a relief to see the Associated Press story describing the increase as, "a 25 percent increase from the current price of 75 cents."

On that note, since Christmas and New Year's Day are on Wednesday, I will not be writing a column for the next two weeks. Thank you for taking time out of your busy schedule to visit our site and read our analysis. I hope we provide a different prospective that helps you with your financial decisions. I would like to extend a special word of thanks to all Prudent Bear Safe Harbor shareholders. It has been an interesting year, and the markets and economy are setting up so 2003 will be just as interesting.

Have a wonderful and safe holiday.


Chad Hudson

Author: Chad Hudson

Chad Hudson
Mid-Week Analysis

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