Questions for Heavy Retail Holders

 | Sep 27, 2013 | 3:00 PM EDT
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I came across an article this morning on Bloomberg News that said the holiday sales should be up almost 5% as consumers are heartened by rising housing prices and steady job growth.

Call me cynical. But I don't believe the fact that you are less under water now and that you can now get a part-time or lower-paying job has that many consumers excited about the upcoming holiday season. It was just a few days ago where consumer confidence dropped as consumers are worried about jobs and wage levels. I don't think that has changed much this week. The same article said that holiday hiring would be down by about 6%. So there will be fewer seasonal jobs and customer service will be horrendous as fewer elves will be around to help shoppers get ready for the holidays.

There are some bright spots in the consumer landscape, such as personal spending being up this morning. As Brian Sozzi pointed out last week, however, those who are spending are doing it with cash as revolving credit outstanding has been declining.

The percentage of folks who can just pay cash for their bigger purchases and holiday buying is nowhere near as big as it used to be. You can spin the numbers anyway you wish, but the simple truth is that the economy is better than it was a few years ago -- but it is a long way from being good.

I know that everybody thinks we will get one of those last-minute deals to avoid a government shutdown, and then a compromise that avoids a fight again on a few weeks over the debt ceiling. What no one has figured into retail projection is what happens if the bungle heads in Congress do not get a deal done and employees, contractors and some benefit programs go unpaid. Spending will grind to a halt across much of the retail sector. In many respects, buying retailers here is a bet on Congress being successful, and that has not been a great bet the past few years.

I have made a lot of money in retailers by buying them when they traded at single digits of earnings and well below book value. In spite of some pretty big hurdles for retailers to meet their numbers and give Wall Street the type of quarterly profits they drool over, there are few companies that qualify. Seneca Foods (SENEA) is cheap enough trading at a little less than 90% of book value and solid financials as does Transworld Entertainment (TWMC) at 83% of tangible book value. But I see far more stocks that would cause me concern if I owned them.

Ralph Lauren (RL) is a good company with great products, but going into the critical fourth quarter selling season the stock trades at 20x earnings and 4x book value. For a company that depends on consumers stepping up a little during the holidays, that seem a little high to me. The stock is not grossly overpriced at this level, but I do not see a lot of upside in the shares either.

If we get an increased reduction selling activity as a result of a government shutdown or other hit to the economy this stock could fall a long way. There may be a little bit of upside but there is tremendous downside and I see no valid reason to own the stock as the fourth quarter begins.

I have been negative on Lululemon (LULU) for some time due to its high valuation and I remain so. I made my first negative comments on the stock almost exactly two years ago today and the stock has lagged the stock market. Traders who got the swings exactly right have made a couple of bucks. But investors would have been better off with their money working somewhere else.

My opinion has not changed on this stock. I just do not think there is enough demand for expensive yoga clothing to make them a fourth quarter retail standout. The stock trades at more than 30x earnings and 10xbook value, so it is hardly a bargain issue at these levels.

Investors with heavy retail holdings should ask themselves some questions now as the quarter comes to a close. Is my stock cheap? Is it reasonably priced or even cheap? Is it expensive as measured by asset value and earnings power? What will cause this company to have an outstanding all important fourth quarter? Why do I think increasingly cautious consumers will plunk down enough cash or use their credit cards to take on debt and buy from this company?

Many retailers are priced like everything is just fine with consumers. It is better than it was but it is a long way from fine.

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