By Nicole Maestri - Analysis
NEW YORK (Reuters) - U.S. retail stocks may be beaten down, but Wall Street analysts say it is too early to buy into a sector facing poor sales prospects and consumers that may be permanently altering spending habits.
Retail stocks have tried to rally since the U.S. Thanksgiving holiday in November, as investors bet retailers had already hit their low point. Many expected the sector to rebound in 2009 after surviving the weakest holiday shopping season in almost four decades.
But industry experts now vary widely in their estimates of when the sector will hit bottom. Some say a low point will likely be reached in the third quarter, while others forecast the worst may not be over until early 2010.
That uncertainty could kill off the classic trade of buying into retail stocks six to 12 months before a recovery.
“Contrary to the old adage, we no longer believe retail stocks are early cycle, as we seem to be at the inflection of a 25-year consumer bull run,” wrote Credit Suisse analyst Paul Lejuez in a research note on Tuesday.
“This belief makes us hesitant to think the worst is behind us just one year into the downturn, as consumers are facing different economic dynamics today.”
At issue is the fear that, even when U.S. consumers are in a better position to spend, they may not want to do so. Retailers, including the chief executive officer of Wal-Mart Stores Inc (WMT.N), said this week the extended downturn may fundamentally change consumer spending habits.
“This is the end of a long run,” said Peter J. Solomon, whose investment bank specializes in retailing. “The consumer got stretched too far and the retailers kept getting easy money to build stores and finance inventories and expand.”
Solomon made the remarks at the National Retail Federation’s annual convention this week.
Consumers began to pare their spending ahead of the 2007 holiday season as the U.S. housing market faltered. They continued to tighten budgets into 2008 as soaring gas prices and rising food costs crimped tight budgets.
But the financial crisis that struck the United States in mid-September spurred a wave of job cuts and investment losses that prompted consumers to pull back even more sharply.
The S&P Retail Index .RLX hit its lowest level since October 1998 on November 21, but has since risen as investors bet the situation could not get any more dire.
But analysts said this week that investors may have jumped the gun. Steep discounts did not convince consumers to splurge this holiday season and there may be no substantial impetus to get them back into stores until the back-to-school season this summer.
“That will be the line in the sand,” said J.P. Morgan analyst Brian Tunick.
Citigroup is forecasting retail stocks will not hit bottom until the second quarter of 2010, according to analyst Deborah Weinswig. She said Kohl’s Corp (KSS.N), Kroger Co (KR.N) and Wal-Mart are the best positioned retailers to weather the current environment.
While many of her clients are sitting on the sidelines holding cash, she said it is too early for investors to jump into the sector. But Weinswig said retail stocks could rally in the middle of this year in anticipation of a better 2010.
Michael Niemira , chief economist for the International Council of Shopping Centers, said there are signs a bottom may be forming. While the group expects 2009 U.S. retail sales to fall 1.8 percent, sharper than the 0.9 percent drop in 2008, sales could rebound to rise 3.3 percent in 2010.
Tunick was more cautious and said he does not yet have a forecast on when retail may hit a bottom. Retailers are heading into 2009 with unemployment at a nearly 16-year high, the housing market struggling, and consumers facing reduced access to credit, which will severely limit spending.
Complicating matters, retailers said the downturn may have a lasting effect on how consumers spend money.
Wal-Mart CEO Lee Scott recently met young merchandise buyers at his company. To save money in the downturn, some of the buyers have given up eating out, while others are foregoing trips to the movie theater.
“They were talking about how good they felt about doing that,” he added.
Mark Zandi, chief economist at Moody’s Economy.com, speaking at the NRF convention, said that, in 1980, consumer spending accounted for 63 percent of the U.S. gross domestic product. That peaked at 71 percent a few quarters ago, as consumers spent beyond their income.
“We are at an inflection point and in the long run that should fall steadily,” he said.
He expects consumer spending as a percent of GDP could slide back to 63 percent to 65 percent in 10 to 15 years.
That means that, even after the economy improves, retailers will be left chasing fewer dollars and discerning consumers that save money and may not spend beyond their means.
Editing by Andre Grenon