Santa Only Brought Coal

In this report, we discuss JC Penney (JCP - Analyst Report), Nordstrom (JWN - Snapshot Report), Sears (SHLD - Analyst Report) and General Growth Properties (GGP - Analyst Report).

This morning, the Census bureau confirmed that it was an absolutely dismal holiday retail sales season. On a seasonally adjusted basis, total retail sales dropped 2.7% from November, and were down 9.8% from a year ago. On top of that, the drop in retail sales in November was revised down to a decline of 2.1% from October rather than the -1.8% originally reported.

If you strip out auto sales (as dismal as the auto sales numbers were), on a month-to-month basis things were even worse, down 3.1% from November, although somewhat better on a year-over-year basis, down 6.7%.

Keep in mind that these are nominal figures, not adjusted for inflation. In real terms, the year-over-year figures are much worse; however they might not be quite as bad on a month-to-month basis because it is possible we are now deflating on the consumer level.

The declines came despite retailers being extremely promotional throughout the holiday season. This indicates that gross margins probably suffered as well as sales -- not a pretty combination. I seriously doubt that gift-card sales will save the retailers in January, so look for some very ugly earnings reports.

If you did get gift cards over the holidays, by all means use them as soon as possible. If a retailer goes belly-up, gift-card holders are unsecured creditors and are likely to get nothing. So use 'em or lose 'em. 

I would expect a rash of store closures and bankruptcies in the retail sector, both "mom & pops" and big chains. Firms in the middle to high-end of the retailing scene seem particularly vulnerable, and even if they avoid going bankrupt do not look like good places to invest. Avoid firms like JC Penney (JCP - Analyst Report), Nordstrom (JWN - Snapshot Report) and Sears (SHLD - Analyst Report). In addition, this will cause serious pain to the owners of malls like General Growth Properties (GGP - Analyst Report). 

Read the full analyst report on JCP.

Read the full analyst report on JWN.

Read the full analyst report on GGP.