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CEO Writes His Own Obituary, Then Drops Dead?

Don’t say I didn’t warn you…

Nearly a month ago, I pointed out the terrible performance of retail stocks and warned against investing in the sector.

Armed with a fresh set of data, it’s time to reiterate my stance. Especially since the talking heads keep trying to convince us otherwise. They swear that the sector’s pain is only a short-lived, weather-related phenomenon.

Nonsense. And today, in true Wall Street Daily myth-busting fashion, I’m going to prove it.

In the process, I plan to reveal one retailer that can forget thriving again anytime soon. It doesn’t stand a chance of even surviving.

As you’ll see, the obituary writes itself…

Back to the Dark Days of the Recession

With more than 50% of retail chains reporting results, the industry is set to suffer its first quarterly profit decline since the Great Recession, according to Retail Metrics, Inc.

There’s no way to blame the drop on fiscal mismanagement, either. The top-line figures paint an equally grim picture.

Final sales are only expected to inch 1% higher, the smallest increase since late 2009. Mind you, that’s after retailers begged consumers to spend by offering discounts of 50% to 60%.

“It was a very tough season for the retailers, no question about it,” says Ken Perkins, President of Retail Metrics. You can say that again.

Even more troubling is the unusually high percentage of retailers that completely missed analysts’ estimates. So far, 34% of companies reported lower-than-expected results, versus the 13-year average “miss rate” of only 20%, says Perkins.

Digging into the data reveals big misses in some cases for the most important metrics, too.

Take The Gap, Inc. (GPS), for instance. Analysts expected a 1.1% increase in same-store sales. Yet the company reported a 7% decline.

Like I said before, the grim market performance jibes with the underlying business performance.

Don’t Buy It

Naturally, prominent industry players, including Target (TGT) and Macy’s (M), want us to believe that the situation isn’t so dire.

They swear it’s just a weather-induced malaise. When the frigid temperatures that forced store closures and put sales on ice for the last few months (finally) warm up, shopping sprees will ensue.

Is there any merit to their convenient “glass half full” outlook? Do crappy winters really portend awesome springs?

Some Wall Street blue bloods want us to believe so.

Guggenheim Partners’ Chief Investment Officer, Scott Minerd, believes the disappointing data is nothing but “transient noise.”

“Based on past experiences where cold weather depressed retail sales in January,” writes Minerd, “There could be a meaningful rebound in consumer activity in the coming months as pent-up demand is released.”

He even has a handy-dandy chart to prove it, too.

Don’t buy it! Much more significant forces than the weather are at work here, which promise to prevent any meaningful recovery in the retail sector. Namely, sluggish job creation and almost non-existent wage growth.

As I shared on Friday, we’re still millions of jobs away from full employment. Needless to say, if you don’t have a job, you’re in no position to go on a spring shopping spree. Ditto if you haven’t been given a raise in years.

The latest actions of major retailers fall far short of pointing to an imminent surge in spending, too. To the contrary, the number (and scope) of store closings recently announced points to tougher times ahead.

Take Staples (SPLS), for instance. It shuttered 42 stores last year and plans to close as many as 225 this year – or about 12% of its North American store count.

Or Children’s Place Retail Stores (PLCE). After closing 41 stores last year, it plans to close another 125.

Then there’s RadioShack (RSH). Last Monday, it announced plans to close over 1,000 stores, or about 20% of its locations in North America. (Cue the obituary.)

The list goes on…

J.C. Penney (JCP), Sears Holding (SHLD) and Macy’s are all downsizing, too.

And if Men’s Wearhouse (MW) and Jos. A. Bank (JOSB) weren’t so preoccupied with trying to buy each other out, they’d probably be announcing closures, too. But I’m sure that’ll come after they finally consummate a deal.

I’m sorry. But an accelerating rate of store closures is anything but a sign of an imminent rebound in demand. Not to mention, it’s a terrible way to grow.

Bottom line: We can’t simply pray for better weather and expect retail sales – and, in turn, retail stock performance – to magically improve. We have to stick to the facts. With that in mind, the latest data and actions by retailers suggest that even darker days lie ahead.

Tune in tomorrow to find out which company I believe faces the grimmest fate of all – and, of course, the smartest way to profit from it.

Ahead of the tape,

Louis Basenese