Another one bites the dust

It's official, KB Toys is facing liquidation. They've had quite the interesting road over the past 8 years, but they haven't been a force in the toy world for awhile. Wal-Mart and electronics have certainly changed that landscape.

As I've said for awhile, the weaker retail hands are going to have to fold. The game continues, fewer players each round. A partial list of the dearly (and somewhat recently) departed:

• Steve & Barry's
• Linens & Things
• Sharper Image
• Boscov's
• Lillian Vernon
• Mervyn's
• Whitehall Jewelry
• Circuit City
• KB Toys

There's more to come. I'd post it here, but then I'd be the subject of hate mail from management teams. That's no fun. Feel free to email me if you want to know my thoughts, though.

Carry on. You probably won't even notice they're gone.

Not your father's recession

Maybe I'm a total pessimist. Maybe. But I don't think so.

Last week I watched so much financial TV that my head came close to exploding. The message, repeated ad nauseum, was that it's time to buy because things are so cheap and the recession must be close to over. Okay. If you think so. But let me give you a few things to think about before you bet your entire retirement account on black.

Yes, the last two recessions have lasted about 8 months. And yes, we're already 12 months into this little piece of recessional happiness. So, that means we're almost done, right? Nope. Why not? Keep reading.

Most recessions come from inventory build-ups. Think back to the year 2000. What tanked technology? All the parts everyone needed to build out the internet were in short supply, so everyone double/triple/quadruple ordered. And then the factories were actually able to deliver what had been ordered... and those who had ordered only needed a fraction of the stuff the other companies were trying to deliver to them. In other words lots of inventory, few corporate buyers. This usual scenario then leads to companies cutting jobs because they have to make less stuff. At this point, the consumer starts feeling the pain and cutting back... and we're almost out of the woods.

This time it's different. Really. It is. Let's look at this recession. Corporate inventory levels haven't been an issue, at least until recently. We got here differently this time. This time what fell apart first? Homes. Who owns homes? Consumers. So, instead of starting with industry and then having the issues filter through to the consumers at the end, we're leading with the consumer.

Let's review what Joe and Jane Consumer have had to deal with over the past couple of years:

• Their home has lost at least 15% of it's value... but more likely somewhere between 25-50% of it's value.
• Their retirement accounts have lost 40% or more of their value.
• The company holding their home equity loan has put the kibosh on further withdrawals.
• Their credit card companies have cut their credit limits and/or raised their interest rates... unless the darn things just got canceled outright.
• Gas and food prices went up astronomically. I'll give you that gas prices are now down at 5 year lows, but with their balance sheets evaporated and their credit essentially maxed out, low gas prices are nice but not enough to make much of a difference at all for the majority of U.S. consumers.
• Oh yeah, and then there was the (un)employment report last Friday. Worst in 30-some-odd years. Sure, employment is a lagging indicator. But it's still falling. And more companies are laying people off.

So, while Black Friday sales were up nicely and Cyber Monday sales were up even better, my interviews with consumers ... and my common sense... tell me that they're buying on deep deep sales when they buy. Holiday sales (oh, heck, can we just call if Christmas please?) are probably going to fall this year. Fall. That's not good. And it will have ripple effects throughout the economy.

Hmmm. Then there's the problems in Detroit. And the still-mostly-frozen credit markets. I'm not very political. But I've been impressed by what Mr. Obama has been putting in place for the future... and by his pragmatic approach to this whole mess. But I have a very strong feeling that around March or so everyone is going to figure out that he doesn't have a magic wand, he can't make it all better quickly... and this market is going to take another dive for the floor.

Remember, stocks are only cheap on a Price/Earnings basis if you know what the earnings are going to be. Forward P/Es are based on someone's best guess of the future. But if that future isn't getting better, it's getting worse, are you really sure about that valuation?

Enjoy this Santa Claus rally. Play it if you want. But don't stay too long at the party, 'cause despite the hair of the dog that everyone seems to think is yummy right now, the hangover isn't anywhere near done.

Just lovely

This morning Sears Holdings (Sears & K-Mart) reported a third quarter loss of $1.16 per share or a loss of $0.90 if you excluded one time items. Analysts (who have been routinely wrong... but to be fair Sears gives no guidance whatsoever) were expecting a loss of $0.51 per share. Sales were lower than expected. Comparable store sales were a lovely -10.6% for the quarter. November comps were -7.8%.


What I loved most was the commentary from management: “Given the current economic and retail environment, we will carefully evaluate alternatives that provide financial flexibility in the near-term, while enhancing shareholder value in the long-term,” said W. Bruce Johnson, Sears Holdings’ interim chief executive officer and president. “These actions may include additional store closings or divestitures, remodels or repositioning of existing stores, acquisitions, and repurchases of our debt and common stock.” (emphasis added)


Acqusitions. Lovely. If there's anyone I want to see buying up other companies in a retail environment like this, it's the retailer who can't manage their way out of a paper bag. Can you imagine the conversaation that must be flowing around that board room? 'The economy stinks. Our business stinks. We have major operational issues. Let's buy someone else and bring them into our muck and mire.'


I am giving them the benefit of the doubt here. I'm believing that they understand how badly the retail business stinks and that they understand that their odor is even more pungent.


I recognize, by the way, that the stock is up over $5 or 15%. But can you say 'short covering'? I knew you could.


Put this one in the 'not even with someone else's money' category for me.

Thanks, that was helpful

Today we have been treated to what my husband calls a blinding glimpse of the obvious: the National Bureau of Economic Research has officially declared this economic malaise to be a recession. Even better? The recession started in December 2007. Today is the first day of December 2008. The insight that the NBER has provided is astounding. The whole thing brings to mind women who supposedly never knew they were pregnant until they gave birth. Quite literally unbelievable.

So, how does this information change your life and mine? Well, I suppose the upside is that now that a recession has actually been declared, we're certainly closer to the end than we were before. Don't mistake what I just wrote - I am NOT saying the end of the recession is near. What I am saying is that getting past denial is the first step to recovery. How long recovery takes depends on the severity of the original illness.

Beyond that? Carry on. Nothing much to see here.

Lovely, shiny pyrite

The talking heads on TV are blathering about how retail sales over the weekend were up higher than expected and don't seem to understand why that number is a false tell. It's simple, really. Yes, people bought more than expected last week. But they were buying the stuff that was on sale, and folks, the discounts that were offered were amazing. Beyond that, and this is probably the most important point, many many people I talked to on Friday morning were doing all their shopping this weekend. Period. Done. Those who weren't going to be finished on Friday were going to wait for more sales. Not a good sign.

Look for all the glimmers of hope you can in the retail reports, folks, but just because it's shiny doesn't mean it's gold.

Only Black in the bleak, dark and gloomy sense of the word

I'm afraid they may have to rename today. Traditionally known as Black Friday because it was they day that most retailers finally made a profit for the year ('went into the black'), this year I'm thinking there's a little more red flowing than normal. The question of the day: Is that red ink or blood flowing through the mall?

As I do every year, I arose this morning at a time that would have been considered uncivilized anywhere in the country, regardless of time zone. By a little after 3am I was chatting with folks lined up outside Kohl's. I followed that up with a trip to Wal-Mart for their 5am opening, then to Target for their 6am opening, and finally a walk through the mall for Macy's, JC Penney, Sears, Nordstrom and all the specialty stores.

Without further ado, this year's view from the battlefield:

• People are hurting financially and it's going to show in sales. 75% of shoppers interviewed are cutting back their spending for this holiday season significantly (anywhere from 30-90% cuts). Of the remaining 25%, most were just holding spending equal to last year, and the few who were spending more were generally in their 20s (no mortgage, little debt) and hadn't spent much last year.
• Consumers are shopping for what's on sale: just having items FOR sale isn't enough anymore. The days of paying whatever you have to just to make sure that a is under the tree for the kids are just plain over. Most consumers were going to multiple stores to buy specific items in each location... and they were shopping fewer stores overall. This, by the way, defeats the purpose of doorbuster sales for the retailers, which are supposed to lure you in and get you to buy some non-discounted items also. The only exceptions to this rule were Wal-Mart shoppers. Wal-Mart management should be pleased to know that only one consumer interviewed in their line had any intention of going to another store after they were done at Wal-Mart. The 'save money, live better' message is resonating well with their consumers!
• Lines are longer than in previous years, but there is less in the baskets and everything in those baskets is pretty deeply discounted. I was asked by a reporter today if that meant bad margins for the stores, and the answer is only a 'maybe.' I know that JC Penney and other retailers have been trying to increase margins anyway they can, including buying items with discounting in mind. An example would be a retailer knowing that their consumer needs to buy jewelry at a certain price point, say $100. Just like last year, the retailer will have items at that price point, but the quality of the item will be lower this year, allowing them to maintain margins.
• There's no place like home. Once again, a lot more shoppers than I expected headed directly to the home departments at Kohl's, Macy's and JC Penney. Even though this stuff hasn't been selling well at full price, if you discount it they will buy.
• Most surprising trend? This year it had to be the lack of a must have item. Sure, parents were buying video games and DVDs for their kids. But only a few parents mentioned the Guitar Hero as something they had to have. GPS units, MP3 players, cheap flat screen TVs were all mentioned as desirable by shoppers... but virtually no one said they'd pay full price to get them.
• Most bags in the mall? This year it was a tie between Macy's and JC Penney, with Bath & Body Works getting special mention as the most prominent specialty retailer.
• The winner of the 'You Think This Stuff is Going to Sell Itself?' Award is Abercrombie & Fitch. Apparently the corporate motto is 'Discounts? We don't need no stinkin' discounts.' Unfortunately, based on the lack of traffic and sales in the store, I beg to differ.
• Biggest fall from favor award goes to Apple. I'm not saying they weren't selling anything, because I'm sure they were, but over the past few years the stores have been packed to overflow on Black Friday. Today? Not so much.

So, what do we do with all this information? I'm going to spend some time this weekend plowing through balance sheets, looking at corporate cash levels, and watching consumers. I firmly believe that today confirms that the holiday retail season is going to be as dismal as advertised, if not worse. I think there might be something to be said for shorting the retail index and pairing that with a long trade for a couple of high quality retail companies. Names to follow.

The New King is a Duke

Congratulations to Mike Duke, the newly named successor to Lee Scott at Wal-Mart. Mike's most recent deployment has been over the international portion of the business. His experience in the firm and in retailing in general will be put to good use heading up the worlds largest retailer.

Although I have to say that the skills that Lee Scott has most utilized over the past three years have been more in the public relations and media arena. It's been all about the old soft shoe... but it's been backed up with action. And for that, I need to add a hearty congratulations to Lee Scott. I know I'm not on his Christmas card list, and in fact seemed to be on Wal-Mart's hit list for a number of years, but Lee, you done good. You fixed the problems. You brought in the right people, let them do what needed to be done, and the results have been worth waiting for. I'm sorry for that time a few years ago when you took a month off and I called for your resignation. It wasn't nice, but I was frustrated. In retrospect, it wouldn't have been the best thing for the company.

Now Lee, go enjoy your retirement. The folks you've put in place will carry on just great. You're leaving at a high point, and you've earned it.