Monday, January 03, 2005

More on retail ...

I wrote a bit about the retail sector in an earlier post on private equity.

Full disclosure : I am just nibbling at this sector, since I see 2 potential shocks that could make even the current valuation look extremely expensive:
  • A fall in consumer confidence. The warning noises about consumer confidence have fallen silent lately, and that is worrying. Given the ever-increasing share of consumer in every sector's spending, a drop in confidence will be painful to retail. While the measured pace of interest rate hikes has so far been uneventful, combined with a fall in home prices (and the accompanying loss of the wealth effect) it could spell disaster for the entire retail sector.
  • Overbuilding. Drive anywhere in Southern California and you feel that there is a new form of land grab out there, with every retailer mindlessly building around every new cluster of homes. Is there really a market for all of them ? I don't think so. If confidence turns south even a little bit, these places will have utility bills higher than their sales!


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