We've all heard Wall Street analysts talk about their "channel checks" at various stores when bolstering their investment outlook on retail stocks. One thing they are referring to is visiting a retailer's sales floor, and the observations they take away. How useful are these observations? The short answer is probably not very. Anecdotal shopping observations are a poor substitute for analysis of a company's financial statements and of sharp judgments about a management team's credibility. After all, retail companies often run a multitude of store concepts, spreading risk across different trends and demographics. Furthermore, other factors like valuation, mergers and acquisitions, capital structure and real estate can affect a company's stock price, and investors shouldn't be fiddling around with their portfolio without full knowledge of the big picture. All that said, good investors armed with this knowledge are also observant in their everyday lives and ready to find investment ideas wherever they go. When it comes to the retail sector, shareholders can benefit from shopping in stores where they hold a stake, or where they're considering buying a stake, and experiencing how the business works first hand. If you're headed to the mall this holiday for some gift-shopping, there's no better time to pop in on those stores in your stock portfolio and see what's going on. On Veterans Day, TheStreet.com accompanied a group of students from Seton Hall's Stillman School of Business to the Palisades Center in West Nyack, N.Y., for an exercise in amateur channel checks. The Palisades is a cutting-edge retailing hub located an hour's drive north of New York City, housing practically all the big names in retailing (except Wal-Mart ( WMT)). It has 270 specialty stores, 14 restaurants, an NHL-size ice skating rink, a 68-foot Ferris wheel, a restored antique carousel, a 21-theater movie complex and a state-of-the-art IMAX Theatre.
By surveying shoppers, checking price tags, and observing customers in stores, the students were able to draw some conclusions about the holiday season that could help guide investment strategies. For starters, the mall was packed with gift-shoppers on a pre-Thanksgiving shopping day that most New Yorkers don't get off from work. This indicates that this year's ultrapromotional environment at mall-based retailers has lured many holiday shoppers out early to take advantage of good deals. The heavy traffic also boded well for consumer attitudes at a time when many on Wall Street are concerned that a spending slowdown is at hand. Random interviews with 564 people showed that about 49% of respondents planned to spend about the same on gifts this year as they did last year, while 35% plan to spend more and 16% plan to spend less. Despite the crude methodology, the results fall somewhere in the middle of similar surveys used on Wall Street, which are currently all over the map as far as this year's spending plans go. Meanwhile, more than 50% of those surveyed said their personal income was the deciding factor in their shopping plans. Only a small minority named fuel prices or rising interest rates as a factor, showing that recent economic trends that have Wall Street on edge may be having only a negligible effect on spending habits. As for popular items, clothing, gift cards and electronics topped the list as most desirable. Best Buy ( BBY) was the most popular shopping destination, followed by Abercrombie & Fitch ( ANF), the Apple ( AAPL) store and Target ( TGT). Looking for shopping activity in stores as a gauge for making investments is tricky. For instance, one could've heard a pin drop inside Gap's ( GPS) new store concept, Forth & Towne. Its namesake store also was quiet, but Old Navy and Banana Republic stores were bustling. Meanwhile, Gap issued particularly bad holiday guidance last week.
Price tags are a more telling sign for an investor shopping the retail landscape. For instance, Wall Street sounded alarms over the summer when Abercrombie revealed that its inventories saw an uncharacteristic rise in the second quarter. The company attributed the increase mainly to its denim stock, which it pumped up aggressively before the holidays in order to capitalize on teen-agers' thirst for high-priced jeans. Abercrombie reported early this month that its inventory levels remained high in the third quarter, totaling $416 million at the end of the quarter, up from $211 million at the same time last year. The company has continued to outperform on a sales and earnings basis, but investors remain concerned that specialty retailers may be facing a denim glut this holiday. Bloated denim inventories could result in massive markdowns in Wall Street favorites like Abercrombie, American Eagle Outfitters ( AEOS), Pacific Sunwear ( PSUN) and Aeropostale ( ARO). Those markdowns could, in turn, eat into profit margins and lead to earnings shortfalls. On Veterans Day, in the Palisades' Abercrombie store, youngsters were lined up with their parents to buy $65 jeans featuring stylish rips and paint splotches, although the bargain rack was loaded with last year's denim fashions. The nearby American Eagle store was equally crowded, and jeans were a bit less expensive. Analysts on Wall Street will be keeping an eye on the situation throughout the season, but savvy retail investors would do well to check channels for themselves, too.