Wednesday, February 27, 2013

The Consumer is Knocked Out

The odds that we're entering a recession just went up.

Retail sales are a leading economic indicator so when a bell weather company like Wal-Mart leaks that poor sales its a big deal.
"In case you haven’t seen a sales report these days, February MTD sales are a total disaster,” Jerry Murray, Wal-Mart’s vice president of finance and logistics, said in a Feb. 12 e-mail to other executives, referring to month-to-date sales. “The worst start to a month I have seen in my ~7 years with the company.... That points to our competitive landscape, which means everyone is suffering and probably worse than we are
It gets better:
“We have to fight against the tougher economic environment to earn a bigger share of a smaller consumer spending pie"

Now today from JC Penny reports horrific earnings:

  • Q4 EPS: ($1.95), Exp. ($0.19) - No, there was no decimal comma error here.
  • Q4 Revenues: $3.884 billion, Exp. $4.09 billion. This includes a "free" 53rd week in the year which generated $163 million. Ex this, Q4 revenue was $3.721 billion.
  • Q4 Comp store sales excluding the 53rd week were down 31.7%
  • Q4 Interent sales down 34.4%  - must be the store layout's fault
  • Q4 Gross margin: 23.8%, Exp. 30.9%;  (30.2% last); "Gross margin was impacted by lower than expected sales and a higher level of clearance merchandise sales related to inventory reductions in 2012"
  • The company's cash declined by $577 million, which is now down to just $930 million. More than all of the company's cash came from Inventory (net working capital) which generated some $1.021 billion in the quarter. 
  • 2012 cash burn was a gargantuan $906 million; this compares to cash flow of +$23 million in 2011.
  • Company is down to $2.3 billion in inventory. We wonder how the credit facility will feel about this.
  • Speaking of credit facility, JCP had no borrowings under its 2012 Revolver, and about $1.3 billion available net of L/Cs. Expect these numbers to change.
Just a reminder, the fourth quarter of 2012 we posted a negative GDP. Now, things seem to be worsening.

CNBC reports:

Faced with delayed tax refunds, an increased paycheck tax bite and higher gas prices, U.S. consumers are proceeding cautiously and scaling back, a trend that has already impacted one large retailer's bottom line.
Nearly three-quarters of those polled by the National Retail Federation said their spending plans are taking a hit due to the expiration of a two-percent cut in payroll taxes that made consumers do a double-take on their paychecks at the start of the year. Lower-income consumers are already feeling the pinch, analysts said.
"We see there's three meaningful headwinds on the lower-income consumer this year that are taking place right now and in order of importance, I'd put it first on the delay in tax refunds," said Peter Keith, a senior research analyst at Piper Jaffray. "Secondly, I'd put it on the payroll tax cut expiration that was mentioned earlier. And lastly, we're starting to see gas prices go up."

To compensate, 46 percent of consumers said they plan to spend less overall while 35 percent plan to watch for sales more often, the NRF said. Dining out and "little luxuries," such as coffee shop visits and manicures, were two other areas where some consumers aimed to cut back on.
The payroll tax will be a significant headwind for retailers this year, said Kimberly Greenberger, a retail analyst at Morgan Stanley who downgraded the retail sector to "cautious" early last month.

So we have a payroll cut, higher gas prices and a possible sequestration that will reduce government spending. The stock market has been moving both up and down by 100+ points each day. Its beginning to remind me of 2007. So will stocks hit new highs? Maybe. But I have a feeling it will be followed by a sharp correction.

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