Connecting the Dots: Kiss Christmas and Retail Stocks Goodbye

In my article from November 17, I touched on the growing number of retailers that report shrinking traffic and disappointing sales:

Our consumer-driven economy is not getting any help from suddenly sober shopaholics. In the most recent report, the Commerce Department reported that retail sales rose by a measly 0.1% in September. And it didn’t matter where you wear Gucci loafers or Red Wing work boots.

Since then, the retail landscape has gotten even muddier.

The Commerce Department reported that retail sales increased by a miserly +0.1% in October, below the +0.3% Wall Street was expecting. Additionally, sales for the month of September were revised downward from +0.1% to 0.0%.

So this is what the last three months look like:

August 0.0%
September 0.0%
October 0.1%

You should pay careful attention to retail sales because there is a strong correlation between plunging retail sales and plunging stock prices!

Walmart, Macy’s, and Nordstrom are the three high-profile retailers to disappoint Wall Street, but they have lots of company.

• Shoe retailer DSW, Inc. lowered its full-year earnings forecast from $1.80 – $1.90 per share to $1.40 – $1.50 per share. The problem? Slow customer traffic.

• The Gap reported that its October same-store sales dropped by 15% at Banana Republic and by 4% at Gap stores. Additionally, the company warned that it would miss Q3 expectations.

• Urban Outfitters reported Q3 sales of $825.3 million, well below the Wall Street pipe dream of $868.9 million. Urban Outfitters’ shares closed down 7.4% to a four-year low after spitting up that revenue hairball.

The biggest confirmation of the retailing woes came from the Port of Long Beach, the second-busiest US port.

The Port of Long Beach handled 307,995 containers in October, down from 310,482 and 0.8% less from the same month last year. More troublesome is the 14% plunge in imported containers since August.

That tells me retailers are cutting back their pre-Christmas orders in anticipation of disappointing holiday sales and due to already bulging inventories.

Speaking of bulging inventories, I want to point out two retailers with ballooning inventories that I think are profit time bombs just waiting to kill investors.

• Lululemon Athletica (LULU): Yoga-pants maker Lululemon has been suffering from an inventory bulge. Inventory hit $280 million, a 55% year-over-year increase.

• Under Armour (UA): Inventory ballooned to $867 million at the end of Q3, a 36% increase.

I’m not suggesting that you rush out, sell all your retail stocks, or short Lululemon and Under Armour tomorrow morning. As always, timing is everything. However, it is crystal clear to me that the Grinch is definitely going to steal Christmas… and that retail stocks are one of the worst places to invest your money.

Find out what other stocks are in peril—and how to make money from the demise of the losers.

Tony Sagami

30-year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here. To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.