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Retail Stocks May Look Good, But There Is Trouble Beneath the Surface


This article is by Neil George, editor of Stocks That Pay You.

As a nation that loves to shop ’till we drop, we need consumers out there spending as wildly as possible to get and keep the economy going.

If you look at the latest round of earnings reports from some retailers, you’d think that engine was tuned for a nice, long ride.

You would be wrong. For behind those better-than-expected quarterly numbers lurks a menacing trend that could mean big trouble for the retail sector.

Let’s take a look at a few retailers that recently reported quarterly earnings. On the low-end discounter level of shops, we had some good news from both Dollar Tree (DLTR) and a favorite of mine, Fred’s (FRED). Dollar Tree saw overall sales up by 12% and more importantly, on a same store basis, sales were up on average of 6%.

Fred’s, which is a broader discount retailer (think a smaller and more targeted Wal-Mart), didn’t post big sales gains, but still managed to report a 19% jump in revenue on a sales decline of 3%. The company continues to watch the efficiency of its investments, closing 74 of its stores, while opening 3 new prototype stores in its selected markets, which accounts for the odd-ball numbers for the quarter.

Several fashion retailers, including Aeropostale (ARO), J. Crew (JCG) and Chicos FAS (CHS) recently reported gains. Aeropostale profits climbed to $38.6 million or 57 cents a share, from $28.1 million or 31 cents per share the same quarter a year ago. J.Crew saw sales gain over 6% over the same quarter last year. And Chicos generated sales gains of 3.6%.

But let’s leave the quarter behind us and instead — let’s look at what’s more likely coming our way.

To get retailers humming enough to earn more for shareholders, they need consumer spending, which isn’t broad based right now.

The fact is, while consumers might say that they’re more confident, as evidenced by the University of Michigan’s Consumer Confidence number, which came in at 65.7, there are still some serious challenges facing retailers.

Retail Stocks will Get Hurt in the Coming Credit Crunch

U.S. consumers need credit — and it’s not there.

The U.S. Federal Reserve tracks how much consumer credit is issued, and that number keeps slipping. The last two reported quarters saw declines in overall consumer credit by 3.1 and 3.5%. The next data point should come out at the end of next month, and it will likely have some issues for retailers to be concerned about.

Credit cards are part and parcel of consumer credit, especially for shoppers. And with the big credit card issuers cutting back, it should trouble.

According to the FDIC, JP Morgan (JPM), Bank of America (BAC), Wells Fargo (WFC) and Citigroup (C) issue two-thirds of all credit cards. Add in the largest lender, American Express (AXP), and combined, these creditors dropped lending to consumers by 1.2% in July alone.

Fair Isaac (FICO) is reporting that the situation is really even worse: So far this year, 33 million credit card consumers have had their credit either pulled or reduced.

But it gets worse going forward. Industry insiders are prognosticating both publicly and privately that the overall credit card market will end up reducing credit overall to consumers this year by 20%. This should be showing up in the coming weeks, as the first round of credit card reform laws kicked in last week and will ramp up even more with the second round of the law kicking in this coming February.

This is where the Fed comes in again with more good news — not. According to a Fed report, its member banks that issue credit cards are projecting 60% cuts in credit card business.

So while corporate retail executives may have been able to tout their Street-beating performance, you, as an investor, have to be live beyond the quarterlies — and beware of what’s coming in the quarterlies to come.

Article printed from InvestorPlace Media,

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