Retailer Stocks Have Further to Fall
By Doug Kass
Street Insight Contributor
8/3/2006 9:00 AM EDT
URL: thestreet.com
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Plagued by a levered balance sheet heavily dependent on rising home and stock prices, the consumer faces numerous headwinds -- and that bodes ill for a range of retailers.
The headwinds include rising inflation and tepid job growth, which leads to flat real disposable income. Moreover, with refinancing cashouts slowing to a crawl, the consumption binge fueled by extracting money out of homes and the negative impact of adjustable mortgage resets will further strain the consumer.
Recently a host of middle-end casual dining companies have experienced weakening comps, including Darden Restaurants (DRI) , Applebee's (APPB) and Outback Steakhouse.
On Monday, Whole Foods (WFMI) whiffed and on Tuesday, Panera Bread (PNRA) disappointed. These two were previously regarded as hyper-growth high-end restaurant concepts.
After Wednesday's close, Starbucks (SBUX) , a standard bearer of the growth set, reported in-line earnings (adjusted for a penny nonrecurring gain) but its comps only rose 4% -- the lowest rate since 2002 -- providing more evidence that even the upscale consumer is about to retrench. (The company rationalized the shortfall by blaming a queuing problem at its stores.)
As night follows day, a consumer-led recession is imminent. Consumers will be downscaling their purchases and increasingly frequenting Gap Stores (GPS) instead of Ralph Lauren (RL) , Blue Nile (NILE) instead of Tiffany (TIF) and the local hardware store instead of Williams Sonoma (WSM) .
By the time all of this is obvious, the Retail HOLDRs Index (RTH) will be trading 5 to 10 points lower than it is now -- and Starbucks comps will have fallen into the low-single-digit area for months on end. |
