The Holiday Spending Head Fake

AngrybearManagement of companies in the retail sector are waking up to sunny skies today.

Evidence is that Black Friday sales moved up 3% over last year.

But sales are not profits, and that is one piece of the puzzle which seems to have been lost.

An increase in sales actually means an increase in losses at some large retailers. Discounts on some items are running as much as 70%. That may bring feet through the door, but is also may mean that each dollar a customer spends could drive a loss of several pennies.

The retail industry is known for its pathetic margins, even when times are good.

According to The New York Times, “The bargains that drove shoppers to stores were so stunning, analysts said that retailers — already suffering from double-digit sales declines the last two months — would probably see their profits erode even further.”

Investors may look at the earliest figures from the weekend and believe that retail stocks are attractive, especially at their present depressed levels. Fourth quarter earnings will almost certainly show that the assumption is not true.

Detroit created the idea that selling in volume is a good idea even if each sale creates a loss. Now retailers have decided to adopt that approach as well.

Douglas A. McIntyre