Are Consumers Turning to Retail Therapy?

GOOD MORNING. Stocks in Asia closed higher today; U.S. futures are pointing to a higher open.

Will American consumers bring holiday cheer to retailers? Traders will get some clues when the government releases October retail sales figures at 8:30 am today, offering some insights into shopping patterns leading up to the critical holiday season.

Analysts expect sales to post a 0.9% gain in October, following a 1.5% decline in September. Weak auto sales dragged down spending in September and car sales have picked up since then, which should help the headline figure. Retailers such as T.J. Maxx (TJX), Saks (SKS) and Nordstrom (JWN) have also reported gains in same-store sales lately, an encouraging sign.

The bigger issue: whether Americans will move beyond the bargain basement and start spending more freely on discretionary items. On that front, the signs aren’t so encouraging. Preliminary figures for consumer sentiment in November posted an ominous (and unexpected) drop, according to the University of Michigan index, which fell to a reading of 66 from 70.6 in October. Consumers are bracing for a “slow and painful recovery in the near term,” says Barclays Capital economist Theresa Chen. And that could mean fewer big-ticket purchases and a leaner pile of presents under the tree. Indeed, two-thirds of consumers plan to shop differently due to concerns about the economy, according to a recent Deloitte survey of over 10,000 adults. Americans also plan to buy fewer gifts than last year, and they plan to spend less--$452 this season compared with $532 in 2008 and $569 in 2007.

If retailers do beat estimates, some analysts think it will be a result of cost cuts and savvy inventory management—not a big bounce in spending. That was the case with Wal-Mart (WMT), for example. The company’s fiscal third-quarter earnings rose 3.2%, beating expectations, but same store sales still posted a 0.4% decline. Wal-Mart’s U.S. chief, Eduardo Castro-Wright, told investors that “customers may be more cautious in their holiday spending." And other Wal-Mart executives reiterated that spending patterns aren’t what they used to be. “The shopper has reset how he is spending money,” Wal-Mart treasurer Charles Holley said, “and that has affected retail in demand.”

IN OTHER NEWS:

For Longtop Financial Technologies (LFT), it’s all about China. A software and IT company for the Chinese financial services industry, Longtop missed expectations for the quarter ending in June, despite strong year-over-year growth. After the market closes today, analysts are expecting the company to report earnings of 36 cents a share, up from 31 cents in the same period last year. Revenue is anticipated to be $37.63 million, representing 33.5% growth from the year-ago period.

Longtop is a strong local player in a sector with room to grow, says Joseph Vafi, an analyst with Jefferies & Company. “The whole Chinese banking industry spends less on tech than Citigroup does,” Vafi says. The company’s growth could slow somewhat from its current pace, but it should continue to expand for a few years yet. In fact, he adds, Longtop has started working on joint ventures with Western software companies and could continue to build on that model.

Historically, Longtop has relied heavily on China’s four biggest banks, but lately it has been diversifying its revenue base with new relationships with smaller banks and non-financial companies. Investors will be looking for Longtop to continue picking up new customers and expanding its newer business areas, says Sean Jackson, an analyst with Avondale Partners, LLC. So far, bigger international players haven’t provided much competition for Longtop in reaching the Chinese market.

This quarter, Longtop could return to its habit of beating expectations, Jackson adds. Chinese banks invested heavily in technology ahead of the Olympics last year, and “after the Olympics were over everybody kind of paused and took a breath,” Jackson says. The second half of the calendar year should see a return to more investment.