Retailers Register Holiday Blues

January 9, 2009

(bettertrades) - Wall Street tanked at the open on Thursday after the nation's retailers posted worse-than-expected December same-store sales. Superstore retailers like Wal-Mart (WMT), Target (TGT), Costco (COST), BJ's (BJ), and J.C. Penney (JCP) saw steep drops in December comparables as consumers continue to rein in spending habits.

The broad-market recovered slightly after Sears (SHLD: +23.3%) upped its quarterly guidance, citing better-than-expected December results. Yet the retail landscape remains bleak.

Wading into the murky waters of the retail sector has been perilous since the housing and credit meltdown began in 2007. Wal-Mart has traded defensively thanks to prescient management decisions using deeply discounted prices, anticipating a dramatic slowdown in economic activity. Lofty expectations and dwindling volume sales of low-margin goods finally caught up to Wal-Mart.

Plunging oil prices and expectations for stimulus spending has failed to lure shoppers to the cash register. Oil prices jumped to $50 mid-week on the Middle East conflict before relinquishing nearly all of the gains due to continued demand destruction. Lower oil prices have provided support for beleaguered consumer confidence, but ominous signs lurk on the horizon. The Labor Report will likely loosen already shaken consumer confidence.

On Friday, the government releases its official Labor report for December. A survey compiled by Bloomberg calls for a 300,000 to 700,000 drop in non-farm payrolls, resulting in a 6.8% to 7.1% unemployment rate. On the heels of November's 533,000 decline, a worse-than-expected employment report would probably drag the broad-market lower.

Cashing in with the retailers remains a risky proposition. In the end, a softening labor environment translates into the massive cutback in consumer spending currently rocking the retailers. Sentiment on Wall Street was banking on Wal-Mart to remain the outperformer. Sears' encouraging revelation on Thursday emphasizes the notion that winners can be had in the retail space, but with Wal-Mart surprising to the downside, all bets are off.