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Retail Still Miles Away From Road to Recovery


Better-than-expected numbers prove stabilization, not recovery.

Retailers surprised Wall Street yesterday, reporting better-than-expected February comps. In fact, estimates were pretty far off.

Despite the seemingly positive news, my interpretation of the monthly comps increases hasn't changed. After an extensive period of negative comps, sales are now slowly starting to bounce higher after hitting rock bottom around November of last year.

As repetitive as I may sound, this upward trend is stabilization, not recovery. Like I pointed out in a recent earnings take on Chico's (CHS), total sales for many companies are still hovering around 2007 levels.

It's been a depressing two years for the retail industry and it's human nature for investors to immediately fall giddy over a few positive reports. Like anything, though, what lies beneath the surface can reveal a very different story. For retails sales, it's an elementary concept.

(See also, Two Ways to Play: Return of the US Consumer?)

Retail sales are generated through consumer spending. Consumer spending is created by people who have jobs. Confirmed today, unemployment remains in dire straights at 9.7%. Simply stated, people don't have jobs, they don't have income, and thus they can't spend money.

The uptick in sales we're currently witnessing is likely coming from the employed who are gaining confidence about their future. Fewer layoffs have eased the fear of being handed a pink slip.

This behavior, again, is stabilization. To have a retail recovery, the economy needs to be on a hiring spree to increase the wealth of the average American. There's no sign that mass-hiring activity is on the horizon. Further, even once those who have been unemployed can find work, they have a lot of making up to do for the lost months -- in some cases years -- of foregone income to recover. So they're more likely to stash away a chunk of that paycheck or pay off debt used to get them through the recession rather than spend it all away.

Don't get me wrong, it's encouraging to see that the retail industry has bottomed out. The trend is favorable, but it isn't indicative of a recovered consumer. The financial crisis damaged both the wallets and psychology of American consumers. There's no switch to simply turn on consumer spending again. While we hope that spending never reaches such irresponsible levels again, it will be a lengthy process of reaching even a normal level of spending again.

Resist falling into the trap and believing that retailers are on the rise again because of a few months of upbeat data. There's a lot that needs to happen before the retail sector experiences true recovery.
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