It's the first day of the fourth quarter, already?
I have no idea where the year has gone. But, now that we are here, undoubtedly discussion among Wall Street folk will start on things like the prospect of a Santa Claus rally, the outcome of the final Fed meeting, and -- you guessed it -- if consumers will come out and splurge during the holidays. It's the state of the consumer market that has me a touch concerned, based on prevalent conditions in the stock market and reflecting a bit on the retail sector's mixed margin performance, this year.
The SPDR S&P Retail ETF (XRT) has fallen about 11% in the past six months (chart below), despite ok jobs data and steady (though unspectacular) income growth, almost suggesting households are prepared to pull back on their spending, this quarter, after looking at their recent 401K statements. Those statements are likely to bring to life the harsh reality of the summer's headlines on the stock market. Until now, the bottom lines of retailers have continued to enjoy the benefits of solid consumer confidence from early in the year. So far, we haven't seen any big, ugly headlines in the retail sector, in terms of warnings, just instances where bad stories like Wal-Mart get worse. People are out there, scooping up big-screen TVs and appliances from Best Buy (BBY), and athletic apparel from Nike (NKE).
Source: Yahoo Finance
But I would be on the lookout for potential landmines in retail, as we approach the holiday season. If consumers pulled back toward the end of the third quarter (and I think they did), it will lead to lackluster results in November. Further, it forces execs to take a cautious stances on the fourth quarter, something the stock market has unlikely priced into valuations. Here are several names to be concerned about, outside of the most obvious.
Macy's (M): Throughout 2015, Macy's has had difficulty selling things in many areas of its stores -- traditional women's apparel and jewelry are just two examples. In a backdrop where the consumer is counting pennies again, I think weak sales trends inside many departments for Macy's will become worse. In turn, that raises the risk of holiday disappointment, and a full month of January where profit-busting discounts take center stage. On the plus side for the company, Macy's is the heartbeat of America, and execs there are doing stuff operationally that the majority of bricks-and-mortar retailers are not.
Kellogg (K): Obviously a food manufacturer, not a retailer. But its products are sold at retailers that are becoming more price competitive than I believe many on Wall Street appreciate. I blame Wal-Mart -- the company is investing in lower prices because its customers are not well off, which is having the effect of causing rivals to drop prices on top-selling items. Price investments by grocers will have to be ratcheted higher, if consumers temper their spending this holiday season. And for those food players that lack the products that are winning in a growing market for indulgent snacks with a healthy angle, as is the case for Kellogg, things could get rough. I also think Kellogg will be hurt by General Mills' (GIS) publicity around its gluten-free cereal launch, which is currently underway.
Tiffany & Co (TIF): It's not only U.S. consumers that could reign in their spending this holiday season, it's likely international consumers who are also exposed to the stock market's swings and currency translation during visits. Tiffany is the quintessential overvalued retail name, at the moment -- it trades at a premium to its peers on the perpetual view that it will be bought out, even as the underlying fundamentals, which include outsized exposure to tourists, continue to be shaky. I think a key part of Tiffany's business this season, gold and silver priced under $750, will feel pressure from the arrival of new smartwatches (led by the Apple Watch) and tech gadgets.
