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Retail & Consumer Products
FY2009 Outlook: Tough road ahead, but there is light at
the end of the tunnel
Discussed below is an overview of our outlook for FY2009. Suffice it to say, FY2008 was a
tough year and FY2009 is shaping up to be even worse. That said, most companies have taken
adequate measures, some faster than others, to minimize their downside risk.
Unfortunately, based on the level of carnage that has happened at the consumer level, we do
not expect consumer spending to rebound very quickly. In fact, we would argue that it might
take a few years for consumer spending to normalize and more than likely it could be several
years before it returns to the levels that not only drove the last economic expansion but also the
considerable retail square footage growth.
However, we believe that FY2009 earnings should be the low point given the strategic initiatives
implemented by most companies to protect their balance sheets and our expectation for a slight
rebound in Holiday sales followed by modest sales increases in FY10.
Nonetheless, we expect the retail sector to remain volatile at least until unemployment and
housing, the two primary spending catalysts, stabilize. While we believe that the Economic
Stimulus Bill should help, we do not expect any real benefit until late in the year.
Accordingly, while there are investment themes that we believe will provide a meaningful return
over a longer time frame, with the operative word being longer-term, the investment strategy
that will likely drive the highest near-term returns is that of trading around the peaks and the
valleys.
FY2009 Outlook
Discussed below is an overview of our outlook for FY2009. Suffice it to say, FY2008 was a tough
year and FY2009 is shaping up to be even worse. That said, most companies have taken
adequate measures, some faster than others, to minimize their downside risk. Unfortunately,
based on the level of carnage that has happened at the consumer level, we do not expect
consumer spending to rebound very quickly. In fact, we would argue that it might take a few years
for consumer spending to normalize and more than likely it could be several years before it
returns to the levels that not only drove the last economic expansion but also the considerable
retail square footage growth. However, we believe that FY2009 earnings should be the low point
given the strategic initiatives implemented by most companies to protect their balance sheets and
our expectation for a slight rebound in Holiday sales followed by modest sales increases in FY10.
Nonetheless, we expect the retail sector to remain volatile at least until unemployment and
housing, the two primary spending catalysts, stabilize. While we believe that the Economic
Stimulus Bill should help, we do not expect any real benefit until late in the year. Accordingly,
while there are investment themes that we believe will provide a meaningful return over a longer
time frame, with the operative word being longer-term, the investment strategy that will likely drive
the highest near-term returns is that of trading around the peaks and the valleys.
The First Half:
Unfortunately, we see no Hail Mary’s in sight during the first half of the year. From a
traditional demand perspective, we remain extremely skeptical about a rebound in consumer
spending over the next six months primarily due the economic crisis and secondarily due to the
lack of a meaningful full price spending catalyst until the start of the Back-to-School (BTS)
season. Historically, the key spending drivers during the first half of the year are Spring Break
and Easter, especially for kids and teens, i.e. new swimsuits, shorts, tees and tanks for Spring
Break and new Easter outfits for kids, although nice to have, these items are not necessarily
viewed as needed, especially if no one is going away on vacation for Spring Break.
As we saw last year, even though the wheels had yet to come off the economy, comps for most
retailers (there were a few exceptions, i.e. ARO, BKE and URBN) during the combined
March/April time frame were fairly soft, with several companies posting negative comps for the
period. Obviously, the general rule of thumb that teens are relatively immune to economic
headwinds did not hold up well as this shopper and/or their parents felt they could make do with
what was already in their closets. In fact, their parents/grandparents, which in many cases is the
Missy customer, sensing imminent economic upheaval due to rising energy and healthcare costs,
higher debt levels and declining net worth, had put the brakes on her own wardrobe needs
several months before.
Therefore, in spite of the fact that Easter/Spring Break comparisons are rather easy this year,
based on recent channel checks and January comps, our sense is that shoppers have gone back
into hiding; spending only on the very basic necessities; accordingly, we do not expect a robust
1H. In fact, as can be seen in the following charts, we count several issues that are likely to curb
any major resurgence in spending for at least the next couple of quarters.
Unemployment, which continues to rise, reaching 7.6% in January culminating in 3.6
million jobs that have been lost since the recession began in December 2007. What is
more disconcerting is that the latest job losses have yet to be reflected in the most recent
sales figures. Moreover, based on the ongoing economic strains, the unemployment rate
is probably going higher before it goes lower. The retail sector has been particularly hard
hit, which is not surprising given the terrible Holiday season; in fact, the retail sector has
been one of the hardest hit, with 570,000 jobs, or 3.6% of total retail jobs lost through
January, certainly not a positive indicator for retail sales or for future teen employment for
that matter.
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