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This morning, Circuit City (CC) the nation’s second largest retailer of consumer-electronics said that it lost $16 million in the third quarter ending Nov. 30. This loss comes on the heals of our warning that "the deflating of the real estate bubble is causing some problems for consumers who have been using home equity extractions to fuel their spending habits."
Since consumers latest fascination is for electronics, the Circuit City news is a tell tail sign of events to come for the retail sector. Shares of Best Buy (BBY) fell 3.3% in sympathy on news of Circuit City's 3rd quarter loss. But last week Best Buy said that “profits for its third quarter, which ended Nov. 25, rose less than estimates because it was forced to cut prices to keep pace with Wal-Mart and Circuit City.”
Bloomberg reported this morning that the International Council of Shopping Centers and UBS said that “Sales at stores open at least a year rose 2.4 percent in the week ended Dec. 16 from a year earlier."
Clearly, consumers have delayed their Christmas purchases in hopes to see massive price discounting in the days leading up to Christmas. I was at our local mall, and stores like Joseph A. Bank (JOSB) and Aeropostale (ARO) have announced 50% off sales.
Clothing retailers have an advantage over electronic retailers since the cost to produce clothing overseas with cheap labor is very low. Some retailers can discount their products 25-50% and still show respectable profits.
So, the next time you are decide to spend $75-$100 for a pair of blue jeans at Abercrombie & Fitch (ANF), or Liz Claiborne (LIZ), you need to realize you are probably paying $50-$75 more than you should.
When I go shopping with my wife, I am amazed at how expensive clothing is for women. When I look at the labels of the clothing on the rack, I know beyond a doubt that the retailer's are charging an exorbitant amount over what each item costs to produce.
All one needs to do is look at the tags or labels on each piece of clothing and they will see "made in" Mexico, Bangladesh, China, etc.
Retailers know that woman and young adults (17-25) encompass the largest and most influential buying groups in the US. Many of the ads we see on TV, magazines, etc, are geared toward these groups. Unfortunately, and what they don't realize, is they are being royally ripped off and taken advantage of.
As for the consumer, the growth of exotic mortgages is finally coming home to roost. Despite the historically low interest rate environment, consumers have gotten themselves into a mess by allowing mortgage lenders to talk them into adjustable rate mortgages and interest only mortgages. How could this have happened when two years ago a home buyer could have locked in a 15- 30 year mortgage below 6 percent?
Today," interest-only and adjustable rate mortgages account for 40% of all loan originations, while 20% of mortgage originations are sub-prime loans."
John Duggan, the Comptroller of the Currency recently said that " 50% of the sub-prime market is now made up of ‘stated income’ mortgages where "the borrower pays the lender not to verify the borrower’s stated income on the loan application, making it possible for the borrower to artificially inflate the size of his or her income in order to qualify for a bigger mortgage."
"The Mortgage Asset Research Institute found that 60% of applications for these ‘stated income’ loans exaggerated income by at least 50%."
It comes as no surprise to us that Circuit City missed their numbers by such a wide margin. Given the mess that the consumer has gotten themselves into, I think more disappointments will come in the weeks ahead.
