American Retailers Reclaiming Their Former
Glory?
The Dynamic Wealth Report
December 31, 2010
by Corey Williams, Editor
All of a sudden, American retail businesses are bubbling with
optimism.
And surprisingly, it has nothing to do with consumer confidence, same
store sales, or any other metric they use to measure the health of the
businesses. In fact, it has nothing at all to do with America.
The truth is companies know growing retail sales in the states will be
difficult.
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Just look at the facts…
For decades, retail sales growth in the US was driven by increasing
consumer and mortgage debt. This process was exaggerated by the real
estate boom that ended in 2006. As property values skyrocketed, consumers
refinanced mortgages or took out home equity loans to pay for anything
and everything.
In short, American households ran up huge debts over the last few
decades. And retailers laughed all the way to the bank.
Now US consumers are deleveraging. In other words, they’re paying off
debt faster than they are racking it up. This deleveraging process could
take years to complete. It means retail sales growth in the US is going
to be slow for years to come.
So, why are retailers so optimistic?
In a word… China.
In the 1990s, western companies rushed into China to setup factories.
They took advantage of cheap labor to manufacture their wares. Then they
transported those products to the US to be sold.
Now, they’re hoping the emerging Chinese middle class will be the source
of spending to propel their sales growth to new heights.
And for good reason…
Recently, China’s government has made it perfectly clear they want to
increase wages and consumer spending. Their goal is to create a more
balanced economy. They know their future success will depend on economic
growth fueled by domestic growth more so than by increasing exports.
This is music to American retailers' ears…
Several major US companies like Wal-Mart (WMT), The Gap (GPS),
Starbucks
(SBUX), McDonald’s (MCD), and Yum! Brands (YUM) are making China the
center piece of their future growth.
By 2015, Starbucks plans to have 1,500 stores in China. That means
they’ll be opening 220 new stores per year…
McDonald’s has 1,100 stores and is opening another 200 stores…
YUM! Brands is already seeing 35% to 40% sales growth in China…
And Gap recently opened their first four Chinese retail stores in
Shanghai and Beijing.
But this is just the beginning…
Of America’s 100 largest retailers, only about a dozen operate stores in
China. That means many US companies will be setting up retail operations
in China for the first time.
The opportunities for growth in China are simply too big and the
headwinds too strong in the US for retailers to ignore. It has the
potential to turn back the clock for many of America’s struggling retail
businesses. And they could once again be the growth stories that made
them such great investments to begin with.
***Editor's Note*** First off we want to wish all
of you a happy and healthy New Year! It's been a great year in the
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money in 2011!
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• KBR (KBR) was upgraded by BB&T Capital Markets
this week. They now have a buy rating and a $37 price target on the
stock. The analyst said rising commodity prices should boost demand for
the construction and engineering firm’s services.
• Cal-Maine Foods (CALM) was downgraded to hold by
Morgan Joseph this week. The country’s largest egg producer's 2nd quarter
earnings came up short of analysts’ estimates.
• BMO Capital Markets started coverage on HiSoft Technology
(HSFT) this week with an outperform rating. The Chinese tech outsourcing
firm has seen sales accelerate the last three quarters.
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