The Weakest Holiday Sales Growth Since 2008 Means It's Time to Short These Retailers

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Initial U.S. retail sales figures released on Wednesday showed sales growth for the holiday season was the worst since 2008.

According to MasterCard SpendingPulse, holiday sales posted a paltry 0.7% increase against expectations of a 3-4% gain. That's below the same period last year when sales grew at a 2% pace.

Analysts looking for a convenient excuse have been quick to blame Hurricane Sandy. But in reality, there's something else much bigger at work here.

That's why I'm actively hunting for shorts in the retail sector right now and will be for much of the first quarter next year.

Following the holiday data and some moderate earnings that incorporate the extra week this quarter, I simply don't think hard-core retail companies like the The Gap (NYSE: GPS), American Eagle Outfitters (NYSE: AEO), The TJX Companies (NYSE: TJX), and Abercrombie and Fitch Co. (NYSE: ANF) – which are up 71.3%, 47.41%, 32.2% and 50.67% respectively year to date through Christmas Eve – will be able to sustain these big up moves.

In fact, there are several real reasons why I think holiday sales were down and consumer spending will continue to drop into 2013, making select retailers good short candidates:

1) People simply have less money in their pockets and economic uncertainty is keeping it there.

The undeniable casualty in this entire mess is consumer confidence. Never mind the "recovery" or the fiscal cliff, the data clearly shows the average American is girding for four more years of economic insecurity.

For example, current consumer confidence figures reflect lows we haven't seen since last June so it's only natural that consumer spending falls as well.

Unfortunately, this is not a situation limited to the United States. As I noted in a recent Fox Business appearance, I see this trend in other countries where wary consumers are also trying to hang on to what they have.

The other key take away here is that inflation is working its way through the system. I know the government says it doesn't exist, or, my personal favorite – is "under control" — but who are they kidding? The thousands of investors I've spoken with over the past 12 months tell me they're getting pinched on all sides.

I guess if you live in Washington and work for the government, you can ignore the official statistics, but out in the real world where people have to pay for everything from food to medicine to fuel and much more, it's a very different picture.

The cost of everything from health care to the food we eat is going up by 10%, 15% or even 20% a year. Here in Oregon, for example, my breakfast costs 60% more than it did a few years ago and my son's tuition has shot up. Our health care premiums have also risen by double digits.

And I know what we're experiencing is not an isolated situation – the dollar quite literally doesn't go as far as it used to.

2) Numb consumers are shifting to non-traditional sales outlets in an attempt to make each dollar they do spend go farther; this is skewing the data.

The SpendingPulse data is supposedly all inclusive and covers retailers in key categories like electronics, jewelry, furniture, and other holiday- related segments. According to MasterCard it's also representative of various forms of purchasing, because it includes cash, checks and, of course, credit card purchases.

I am not so sure this data set is what it's cracked up to be.

I've noticed a shift in purchasing patterns that reflects consumers patronizing non-traditional outlets like craft stores, farmer's markets, and online versions of non-traditional retailers like Etsy.com, which bills itself as the world's most vibrant handmade marketplace.

Even if many of these outlets are included in the SpendingPulse data, they end up being dropped because they don't meet the "same store" criteria – meaning that statisticians may not include them because the data being measured must come from stores open at least a year in an effort to smooth volatility.

There's also the rise in coupon redemption and the shift to value retailers to consider. It's no longer essential to have the absolute latest and greatest when it comes to shopping.

Consumers, for example, may conclude that an older- generation iPad is just as good as a brand new one. So, that likely drops the aggregate value of purchases, because last year's models may be clearance priced or simply not worth as much as the top of the line.

And that speaks to something else at work. Many value- conscious consumers are increasingly content to shop at club stores or at retailers with broadly defined product sets that cross historically significant boundaries. Examples include grocery stores that now integrate consumer staples, or department stores like Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) that now include food items.

And finally…

3) Retailers are, at least in part, to blame.

By stretching the holiday shopping season forward with displays that effectively bookend the holiday buying season and extend well beyond the two months that are traditionally measured, they are ensuring a holiday spending "slump," for lack of a better term, because the spending is less concentrated.

This year, for instance, I saw a good deal many more Christmas displays going up before Halloween than I've noticed in past years. Now, I'm seeing considerably more discounting online and in the local stores for post-holiday sales than I can recall in years.

It's entirely possible under the circumstances that consumers may simply be shopping earlier or waiting until after the holidays to catch the real bargains. Depending on how much consumers purchase and when they buy, this could just skew the numbers or remove them from the accounting period al together.

Personally speaking though, I see a backlash building.

Holidays have become overly commercialized "events" that are literally nothing more than an excuse to spend money. Many consumers have not only lost the "spirit" but have turned downright negative towards it all.

Under the circumstances, I can easily envision a return to basics building in the next few years that dramatically reduces retail spending overall, and on a level far more dramatic than most retailers can envision today.

Looking forward, there are clearly going to be ramifications for all of this, and I think the preliminary holiday data is going to work its way through the entire consumer purchasing experience in 2013 on several levels.

Hurt by slower sales this season, retailers are likely going to slow down their ordering. That's going to reverberate all the way through the purchasing chain. Retailers will be less likely to warehouse materials so the supply chain will be tightened further.

This translates into lower restocking levels and slowing shipment volumes, particularly if next year's consumer data remains dodgy. It also suggests a corresponding drop in wholesale purchasing activity.

Meanwhile, manufacturers are likely to cut back on production, materials purchases and – you guessed it – labor as a means of compensating. That, in turn, pushes back into raw materials and sub-assembly.

Obviously one data point does not make a trend, but the latest SpendingPulse data calls into question the very notion of a recovery in my mind.

Perhaps I'm just in a curmudgeon-like mood this morning, but I simply cannot see shell-shocked consumers who have endured the fiscal hell of the financial crisis suddenly opening up their wallets and returning to spending levels associated with the "good-old days" no matter what hare brained stimulus schemes Washington comes up with next.

If anything, I think they'll cut back even further.

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. Cath | December 28, 2012

    I love this article and I notice that people seem to be spending less too. I hope there is a realization that as families we need every penny we have to pay for our health care, taxes and to support government workers pensions. It is time to let go of our materialistic ways and deal with our families future which will require lots of savings.

  2. babe | December 28, 2012

    sales—-i work for a major company—our sales exceded last years–where all this money came from was unbelievable–buying this product, does not put food on the table–it certainly is a luxury-

    well—-this is Florida—welcome

  3. Rob Slone | December 28, 2012

    I know I have welfare, Medicaid, Medicare, and now birth control pills to pay for. Not to mention Obamaphones. I can't afford to buy a lot of things if I want to have things like heat, food, clothing, adequate transportation. Thank you Mr. President. May I have another…….?

    • Buck OFama | December 31, 2012

      Mr what???!! This is NOT a president, but rather a Communist s—-head masquerading as President.

  4. Vernon | December 28, 2012

    Over the past 20 years I have kept accurate records of my income and expenditure and I am amazed to see how cost have risen, especially over the past 6 months. Most people don't keep accurate records of theire monthly expenditure as I do and what I have noticed is that most people pay for their purchases with their credit cards and in many instances pay for their grocery purchases on their budget account, which means they are borrowing money for food and utilities etcetera. Many purchases like a new bed or to replace the old car is now completely out of the question. I have notices that food alone represents over 30% of my income each month. If fuel and utilities goes up any further and my income stays were it is I can see some very serious problems down the road. The other problem is that if business gets worse that puts my job in jeopardy as well and if I were to lose my income what would I do then.

  5. Arem | December 28, 2012

    AGRRED! I work at a big-box retailer, and can tell you that our store started “setting up” for Christmas already in August – and in a major way, too – which is easily far earlier than ever before, and this is my 11th “Holiday Season”. Sales volume for the (Black Friday) "Annual Event" (it's now called, here) fell far short of last year's mark, never mind hit the (higher) budget target for this year. Traffic seemed “down” particularly compared to last year, but two factors you overlooked a bit are (1) the new innovation of Black Friday commencing on Thanksgiving Day (Thursday), and (2) with Specials staggered at 2- or 3-hour intervals “all night long” (8pm to 5am, I think is was). How many customers are going to “stay here” for (say) 10 hours? Or leave to hit other store Specials, come back for our next, leave again, come back again, & etc.? I also suspect that more than a few Americans were just plain put off/disgusted by the evident “greed” implicit in the act of butchering a classic Traditional Family Holiday (Thanksgiving)! – that “backlash” you mentioned.

    Speaking of myself, I didn't buy a single “gift” this year – not even a “little something special” just for me (which was all of a DVD last year, about $25). Yup, I'm hunkering down for “FOUR MORE YEARS”! And bye the way – this particular big-box retailer is artificially juicing its “bottom line” by reducing payroll via cuts in scheduled hours for the wage-slaves. This tactic started January 2012 already, and continues into 2013 (as I see from my own work schedule, being one of those wage-slaves: I'd guesstimate this "cost/lost" me about 3 full weeks of erstwhile earnings out of 52 over all of 2012. And that's offset only by the $16/week raise I was awarded via my "Annual Performance Review" (August) — the lowest possible "raise" short of imminent termination — which I predicted would happen back in January when the "hours cuts" were first introduced).

    Consequences? Completely predictable. “Stocking” has suffered much. And since you can't sell what isn't “there” to be sold, Sales takes a hit. Fewer hours scheduled means fewer bodies around to “assist” shoppers, and Sales takes another hit right along with “street rep”. Fewer bodies around also translates into a “tidiness” issue that simply snowballs (of course), which has an adverse affect on both shoppers as well as employees. And not to be overlooked is the deteriorating “attitude” of the employees themselves; overworked and under-appreciated, WE KNOW EXACTLY “what's wrong” – but Management never “asks”, and in any event is otherwise “deaf” as well. 'Think Customers DON'T NOTICE this stuff? WRONG! Even my mother (82) has asked me who exactly she should demand to speak with about both "stockouts" and the absence of employees to render "Customer Service!" — the one-time HALLMARK of this particular BIG big-box retailer, whose identity should now no longer be a mystery.

    Keith — I think your notion of hunting retailers to “short” in 2013 is a very good idea. I realize that "mine" has become a Love Child of sorts over the past year or so, but you might want to take another — longer & closer — look. From my perspective, this outfit has some serious endemic as well as systemic issues about which it is either ignorant, ignoring, or side-stepping with PR BS. I'd suggest starting with the qualities and qualifications of "store-level management". More bluntly, these are "cluess children" lacking both real-world work experience AND practical common sense … and I see the consequences of both every single minute, every day, week after month after year. Worse, they are the exact opposite of "problem-solvers"; i.e., they ARE "The Problem"! — aided and abetted by equally incompetent District and Regional managers who have apparently "lost" any interest in all three of the oft-hyped CORE BELIEFS of this organization.

  6. Mark | December 28, 2012

    Arem, I am on the reduced side of hours of labor, Some companies need to do this just to survive. My store (where I work not my store) survived the 2008 melt down. I still have a low paying job, yet I still have a job. Any extra money goes to pay debt. I only bought 2 christmas presents this year vs. about 20, 4 years ago. Reducing debt make's your life, a better place, credit is reserved for the car that get's me to work if it breaks down. The idiot's in Washington are so stupid. I wish my state would succeed, or any state would, I would wait a few months and move there. Our representation is bought and sold. The exact reason why the revolutionary war happened is what is happening today. Our money has lost 90% of it's value in my lifetime. I would never go shoot up the place to escape, however, a state needs to leave. We need to have choices at this point in time. Our current Government is so corrupt, that I think If just one state opted out It would make it better for the country for all. All Empires crumble, we are no different. The New Swiss Bank could be in Texas. If Texas fould it nessary to attack somewhere in the Middle East people could contribute. If the people wanted to shoot to kill to keep their land from being invaded They could do that. If the people in Texas wanted to Opt out of the EPA they could do that. Our trust in our government needs to be examined. If you paid no federal income taxes just state, would your life be better? I think so, They might be raised but not enought to pay for big government. This nation is falling apart.

  7. Keith Fitz-Gerald | December 28, 2012

    Thank you for reading and for being part of the Money Morning Family. I am humbled by the obviously deep thinking and keenly personal perspective you've all shared today.

    Please keep those thoughts coming for, as we head into 2013, banding together to share perspectives, ideas and our thinking may be the silver lining we need in otherwise problematic times.

    Respectfully,

    Keith

  8. Brad | December 28, 2012

    Really glad to come across your article Keith. I didn't realize others had noticed these trends. The post Christmas numbers of .7% increase seemed like a coverup to disguise a negative number.

    Not sure I want to short just so quick because there are still tricks left up their sleeve to make things look Ok. Cutting back on wage slave hours as mentioned might intensify. Cutting back on inventory purchasing in the short run can also make it seem healthier than it is.

    All in all you're right on target for the 2013 and with that Happy New Year. Now let me get back to laughing at the distraction called the cliff. Disappointed that the strike was averted because this was the perfect excuse to allow retailers to clear inventory but alas that's just a month off – timing.

  9. Ruby Thomas | December 28, 2012

    I am probably NUTS, but I am so angry, fearful and TOTALLY disgusted with the state of affairs in our country, and have been for SO L-O-N-G, that I went the opposite direction for Christmas! I have never been so totally disenchanted and discouraged with my country. George Wawshington was profound when he said "These are the times that try mens' souls". Well, history almost always repeats itself. Here we are again, watching our constitution being trampled upon. I was again, so enraged about the Obama's 4 million $$ vacation to Hawaii {their 23rd vacation in 4 yrs. on our dime}that I said "screw it". I HAVE NOT HAD A VACATION SINCE 2005. I am 66 yrz old. I TAKE CARE OF AN INVALID HUSBAND,AND HAVE FOR 22 YRS., and I STILL WORK. 20% of my co-workers got layed off on December 7, and I am grateful to still have a job. As a result, I can afford it, THIS YEAR, so, I decided to go out with a bang! I took my only child (an adult, who could take care of me!) to Maui for 6 days and I splurged on those I love for Christmas. I gave more to charity than ever before at Christmas time. I do not expect to ever be able to do this again. So off I go, over the cliff with my fellow Americans, if need be! I am sick and tired of being so frugal and responsible and pinching every penney 'till poor 'Ol Abe squeals! We freeze in the winter, roast in the summer; buy bare necessities and groceries, trying always to save money! I do not expect my meager savings or minimal investments to be standing much longer, so for me, "This is the Moment". I actually made this decision immediately after Marco Rubio's speech @ the convention. It was so inspiring. He got me out of fear, and back into pride as a hard-working American who deserves to expect more. For that I say "Thank God", and "Thank you Marko Rubio". To quote Esther, from the Bible, if I perish, I perish! I may have no money, but I will have wonderful memories! And, I might add, no regrets. Now, it is time to get back to the grindstone. Eat, Work, Pinch Pennies, and Pray!

  10. ed the grocer | December 30, 2012

    I am forty one years a retailer in the same spot plus another seventy in the family. There is a trend that is somewhat overwhelming. It is called the intelligent consumer. Thanks can go mainly to the internet. A growing number of customers are anti vaccine, anti gluten, anti fruit sugar, anti mercury, anti fluoride, anti GMO, anti processed food, especially anti China, anti pharmaceuticals, and more. It is a trend that can't be stopped and when it is done we won't recognize the marketplace. Essentially the customer will pay more for quality.

  11. H. Craig Bradley | December 30, 2012

    DEFAULT OR NOT ??

    Banding together in troubled times at the local level or perhaps online is how like-minded people often relate. Lets face it, in Oregon, Calif., or anywhere U.S.A. these days, you often have little in common other than than the same passport cover with the average citizen on the street. America is probably in the early stages of a financial collapse. Right now, its not quite clear where we are going- except we all know its is NOT Forward. Anything could happen, anything.

    Here is some food for thought. If America were to experience the level of hyperinflation that Zimbabwe has had ( 200%-2,000% year), then the U.S. Government could eventually pay off the ENTIRE national debt of $16.5 Trillion Dollars with only a single copper penny. Like the restroom on the South African border with Zimbabe has posted a sign that reads: " Toilet Paper Only, No newpapers, No ZIM Dollars".

  12. H. Craig Bradley | December 30, 2012

    Banding together in troubled times at the local level or perhaps online is how like-minded people often relate. Lets face it, in Oregon, Calif., or anywhere U.S.A. these days, you often have little in common other than than the same passport cover with the average citizen on the street. America is probably in the early stages of a financial collapse. Right now, its not quite clear where we are going- except we all know its is NOT Forward. Anything could happen, anything.

  13. Bert | January 2, 2013

    I agree with most of the comments entered here; however, I did not see a comment that addresses a major problem that I see with most retailer today. 1) Most advertise the "holiday season", I like most people I know buy "Christmas" gifts. I have never bought a holliday gift and have no plans to buy one in the future.) 2 Retailers and the public in general are trying to kill off Santa Clause. Both Christmas and Santa Clause with its bright decorations and "up" music inspires persons to throw caution to the wind and spend more than they should. Like I said before, I have never bought a "holiday gift" but, I have always over spent on Christmas and Santa Clause for my family and friends.

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