Thursday, December 4, 2008

Retail sales are misleading...watch what happens to earnings

Target is one of the companies I think I'm most likely to buy on the economic recovery (I won't be buying for at least six months) so I am watching them carefully and cheering the stock down. Today they released pretty dismal sales results for November with same store sales declining more than 10%.

To the extent that sales reports have been good for black Friday, I have two comments. The first is that this doesn't mean that sales will be good for the rest of the shopping season - and in fact I think it makes it more likely sales will be worse. The second comment is that while overall sales were up a tad on Friday, volume skyrocketed.

This confirms our working thesis here, which is that sales were only made on heavily discounted items. People came in for the doorbusters, and then went home. They did the same thing this past Monday with online sales. What matters for stock prices at the end of the day isn't sales, it's earnings. And with the enormous discounts that have been offered, sales will not result in earnings. Retailers are selling on extremely thin margins.

You know, I actually never went to bed on Thanksgiving. I waited for everyone else to go to bed, and then I went shopping. I decided it was finally time to replace my 1990s-era high school wardrobe, and the outlets here opened at midnight. I went to the Neiman Marcus Last Call store and bought probably 20 pieces. I shopped for 13.5 hours straight (save a 45-minute nap in the car). I was buying $185 Burberry shirts for $35. I got a fitted Van Huesen for $9.50. I bought Armani Collezioni wool trousers (retail $550) for $95. There is no way anyone has any margin on that at all.

And of course, I was paying attention to foot traffic the entire time. At 12am people were literally running into the store as I drove up to my parking spot. By 1am the store was almost cleared out. People got their "door busters" and went home.

Stocks will go down a little today because of poor sales numbers...but just watch what happens at the end of the quarter on earnings numbers. Many retailers will have no earnings at all. The average Joe Citizen has a hard time valueing a company when he looks at that P/E number and sees "N/A" instead.

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