I Know What the Economy Did Last Summer Part 1 : Carmageddon and the Retail Apocalypse

by David Haggith, The Great Recession Blog:

Summer closed in a whirlwind of weather chaos for the United States and its territories. At the start of the summer, the US economy began to show signs that it was flying apart. The two most obvious were the big blowouts in the auto industry and in retail, not all of which could be attributed to a shift to online sales.

Carmageddon crashes on

The auto industry rolled over this year and began a decline similar to the one we experienced at the start of the Great Recession. (See “Carmageddon Crashes into ‘the Recovery’ Right on Schedule.”)

In response, car markers started offering record incentives (like $0 down, 0% interest on a 80-month loan), which brought an improvement to sales in July. You have to ask, just as I did back in 2007, “What is the end game when such incentives take profit down to nil?”

Used car prices, on the other hand (not having such major incentives), plunged to their lowest level since 2009. New car prices have also fallen all year (as another part of the major incentives) and dropped almost a thousand dollars on average just between June and July (as part of the incentives package).

Even with such pricing and financing incentives, one firm, SouthBay Research, threw cold water on the Census Bureau’s July sales report, declaring the figures “unbelievable.”

Over the summer, delinquencies also spiked on “deep sub-prime auto loans” (now matching — like so many other things in the auto industry — their crisis-era milestone from 2007). Delinquencies rose across all credit scores, but these things always hit worse at the bottom and eventually work their way up. Is it any wonder “deep sub-prime” delinquencies are up, given the old 2007 tricks that dealers and financiers began offering this summer as yet another incentive? Look at the following ad:

That’s rght. If you have a really bad credit score, you get an extra $1,500 off! Let’s bait the people who can least afford to purchase a $40,000 truck into taking out a loan by offering them a reward for having bad credit.

It was hurricanes to the rescue this year however, as Harvey and Irma wiped out something like a million automobiles. Those will for the most part be quickly replaced, effectively shifting the auto manufacturers’ problems for this year over to the insurance companies who will pay for most of that replacement and to uninsured individuals who will pony up if they can in order to stay in transportation. The hurricanes will force many people and businesses to make car and truck purchases they would not otherwise have made … if they can somehow swing a little more debt. (They’d better hope they have bad credit in order to make it a little easier.)

The hurricanes will not, however, solve any of the auto manufacturers’ troubles for next year. In fact, they likely make next year worse by moving purchases up. (See “Hurricanes Harvey and Irma May Lend Helping Hand to Economy.”)

Summer also deepened the retail apocalypse that I wrote about earlier and that has become the economic topic of the year. (See “Retail Apocalypse Engulfs US Economy.”) JC Penny reported in August that its latest quarter receded further. Macy’s and Kohl’s reported similar results. Shares of all companies tumbled on the news.

Sporting Goods Stores joined the big clothing stores in a cacophony of bad news. Dicks Sporting Goods reported horrible results and saw its stocks plunge, and Dicks notably did not hold out hope that the worst was behind it. Instead, it slashed its future guidance lower than the lowest sell-side forecasts. Sad quarterly results from two other sporting goods stores — Hibbett and Foot Locker — confirmed Dicks’ longterm assessment of the brick-and-mortar sporting goods market.

“Athletic apparel and footwear is over-distributed and there is too much inventory in the channel,” John Zolidis, president of research firm Quo Vadis Capital Inc, wrote in a note. “We see potentially several years of retrenchment as supply is reduced to meet the new, lower level of demand…. We predict several years of pain for the companies that compete in this arena.” (Zero Hedge)

Even kids toys took a major tumble, unable to hold out for the next holiday season. As the end of summer neared, Toys “R” Us crumpled like a dry autumn leaf almost overnight. So it appeared, but these things are long in development and merely held out of sight as long as possible. As Zero Hedge laid out,

The company spends millions of dollars every month on expensive lawyers … investment bankers … turnaround advisors … claims administrators, etc., who all spend many sleepless nights in the days leading up to a [chapter 11 bankruptcy] filing…. CEO David Brandon explains why Toys “R” Us was forced to file for bankruptcy in such a hurry…. Debt … “Toys ‘R’ Us … has been operating for more than a decade with significant leverage, necessitating the use of substantial amounts of cash each year….” But these substantial debt service obligations impair the Company’s ability to invest in its business and future.

As ZH wryly noted, “Apparently spending … on debt service while ignoring capital improvements and store remodels is a bad long-term business strategy.” I’ve been noting for a couple of years on this blog that there would prove to be a severe down-the-road cost from so many companies using low interest rates to invest in stock buybacks to create the illusion of higher profits and to make shareholders rich the easy way, instead of using those loans to do the hard work of research, development, and capital improvements. So, who woulda thunk that stock buybacks are not a longterm plan for corporate success?

As John Rubino of the Dollar Collapse blog wrote,

Long credit cycles like the current one always end with a crash. But first they deteriorate. The headline numbers remain positive while under the surface a growing list of sectors start to falter. It’s only when the latter reach a critical mass that market psychology turns dark. How far along is this process today? Pretty far, it seems, as some high-profile industries roll over.

Given how leveraged many companies have become as they chose to buy up their own stocks during the recovery, rather than invest in capital, one must wonder what retail company has lawyers working overnight right now in order to become the next to fold overnight. Ah, well, this one was just a toy company. How much can that matter in an adult world?

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