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Goldman Sachs’ Christmas warning

Talking Numbers

Goldman Sachs downgraded shares of The Gap ahead of the critical holiday shopping season. Is this a sign retail may be in trouble?

The Gap, one of the nation's largest retailers, was just downgraded by Goldman Sachs ahead of the critical holiday shopping season. Is this a sign of trouble ahead for retailers in general?

On Monday, Goldman lowered its ratings on the Gap (ticker symbol GPS) from "buy" to "neutral", saying:

"We downgrade GPS to Neutral from Buy as we expect near-term demand headwinds will hamper comp sales and gross margin. Recent data points have left us incrementally more concerned about the prospects for 3Q13 and holiday: (1) GPS September sales report exposed vulnerability to macro challenges, including traffic weakness and a need to step-up promotions; this is a change for GPS which YTD was insulated from macro weakness, (2) pricing points to a tough October for the Gap brand, and (3) we see little to improve the course of business between now and holiday. Since adding GPS to the Buy List on 12/11/12, the stock is +19.1% vs. the S&P 500 +24.2%."

In other words, the Gap is exposed to weakness in the economy and it won't get better during the holidays. Also, in the past year, the stock has underperformed the benchmark S&P 500 index.

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The most recent data from the US Commerce Department showed modest increases in retail spending but only when factoring out automobile sales. Retail sales were up 0.4% in September excluding autos. However, add in the 2.4% drop in car sales and total retail sales were down 0.1%.

Meanwhile, some data for October are showing signs of potential trouble for spending growth. Consumer sentiment for that month took a dip in the midst of last month's budget battle and partial federal government shutdown. The Thomson Reuters/University of Michigan consumer sentiment index dropped to 73.2 from September's 77.5. That's the lowest it's been all year.

"The general expectation is that this holiday season is not going to be that good across the board," says CNBC contributor Gina Sanchez, founder of Chantico Global.

The charts for the SPDR S&P Retail ETF (the XRT) also show signs of trouble, according to Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson. The XRT is up nearly 37% compared to 24% for the market benchmark S&P 500 index. However, Ross sees some technical indicators that may lead to worry.

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"I think that the technical structure of this chart actually belies some of those more bearish headlines as we enter the holiday season," says Ross. "And, that's what has me concerned."

What's next for retail and the ETF that tracts the sector, the XRT? Watch the video above to see Sanchez's analysis from the fundamentals perspective and Ross' technical analysis on the XRT.

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