Large US Retailers at Risk as Imports Decline.

Implications: As US retailers reduce imports, large companies operating  retailing stores overseas may see international sales growth decline.  Here's why international growth may not be the panacea for retail success.

Analysis: Retail hasn’t been a sector that has got a lot of investor attention lately.  Retail stocks that have caught investor’s eye, though only briefly, have been those with a sizable presence in overseas markets.  Some stocks that come to mind would be Wal-Mart, Costco, Tiffany, GAP, and Movado, just to name a few.  Investor’s rationale seems to be that a weak US dollar will accelerate sales growth overseas which will mitigate sales declines in the US market.  

That’s probably true up to a point.  But realistically, the theory is more about timing than market structure.  Today, consumer markets are linked and while there maybe some lag time, eventually, a declining US economy will negatively affect most overseas economies.  Western European businesses are just now beginning to feel the effects of decreased consumer spending in the US.  In part the issue is reduced demand, but it is also because of increased prices due to the weakness of the US dollar.  Today, US retailers are reducing imports and substituting less expansive American made products instead.  The effects of weak US dollar are not limited to imports only.  Tourism is also declining which is also bad news for most European retailers.  American tourist’s revenue accounts for a significant portion of many overseas retailer sales and European Union’s growth in GNP  

While some large company’s like Wal-Mart and Best Buy have targeted emerging countries for future growth, near term most of these investments will be cash negative.  Moreover, as US demand declines, so will the imports from these countries which will adversely affect domestic demand in places like China and India.  That means retail investments in these countries will take longer to become profitable.  

The fact is none of these emerging countries have the consumer buying power of the US economy.  Unfortunately, all of them, including the European Union, depend on exports to the US for much of their GNP.  So any US monetary policy that deflates the US dollar in the hopes of growing US exports is doomed to failure at the outset today.  Equally doomed is any retail strategy that proffers to grow profitable sales overseas, long term, while consumer spending in the US declines.  

The inconvenient truth is the commercial policies of the US over the last 20 years have had the effect of redistributing economic wealth among the nations of the world.  While US retailers and consumers benefited from these policies when much of industrialized world was fragmented and the remainder where 3rd world economies, economic unification and neo-industrialization is now shifting accumulated US wealth to global economies.  That has significant implications for retailing in the US in terms of the number, size, and profitability of retailers in the sector in the future.