Since September 2004, the S&P Retail Index has been stuck in a consolidation channel between 400 and 500, and it hasn't been able to move in either direction in a stable way. Since then, the monthly retail numbers have been mostly all over the place. But in January, retail sales (not including cars) grew by 2.20 percent, which was much higher than what was expected (0.8 percent). It was the best reading in a long time.
But retailers across the country gave mixed reports on Thursday, which seems to be making the initial optimism fade. From what we know so far, same-store sales growth will not be as good as it was in January.
Because it was warmer than usual in January, the reading may have been an outlier. When the cold weather came back in February, it seems like consumers' wallets felt a chill. Also, the good sales in January may have made people less likely to spend in February.
The fact is that the lack of a positive trend in retail makes it riskier to buy retail stocks. You have to choose the right business. Even big stocks like Wal-Mart Stores (WMT), which has had good sales results and same-store sales growth, is having trouble with its share price. But the current value is worth looking at.
Gap (GPS), a store that sells clothes for young people, is clearly having trouble at the cash register. Its February same-store sales dropped 11% compared to the same month last year. This was much worse than the 6.80% drop that Wall Street was expecting. This happened after the company's earnings for the fourth quarter dropped by 11% and its forecast for the next year fell short of what Wall Street expected.
GAP thinks that comparable-store sales will be down in the first half of the year and only slightly up for the rest of the year. Most people think that same-store sales are the best way to tell how well a store is doing.
For investors, it's clear that GAP is a turnaround play that could pay off if it can find a way to bring in customers. The fact is that the company has a strong brand, which is important in a world where brands are important.
On the bright side, there are companies like Best Buy (BBY), which is the market leader in consumer electronics and has a lot of customers. The stock is just below its 52-week high, and it is up 69 percent from its low point for the year.
In reality, the rising debt levels in America could cause financing costs to go up, which could affect how much people spend at stores. The rate at which people save money is going down, and in January it was negative. People are spending money they had saved, which can't be good for retail.
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