Will the Layaway Revival Come Back to Bite Retailers?

Will the Layaway Revival Come Back to Bite Retailers?
Will the Layaway Revival Come Back to Bite Retailers?

Layaway became obsolete in the bubble years, an anachronism from bygone times when many consumers couldn't or wouldn't access credit. In today's rough economy, layaway is making a comeback for the holiday season. But for investors who hold certain retail stocks, this may mean lumps of coal in their portfolios come holiday time.

Sears Holdings (SHLD), which includes Kmart, was the first big-box retailer to bring back layaway in a major way in 2008. This year, discount giant Walmart (WMT) and Toys R Us have revived layaway programs for the holiday season. Best Buy (BBY), Target (TGT), and TJX Cos.' (TJX) TJ Maxx and Marshall's offer layaway programs, too.

Layaway allows shoppers to put merchandise on hold and pay cash in installments until they can take home the items paid in full. Of course, there's plenty of fine print in these buy-now-pay-later contracts: Most programs include setup fees (including cancellation fees), minimum purchase sums, and time limits for payment. (See Is Layaway Right For You?)

The programs aren't as popular as they might be: Some survey respondents reported that they would be more likely to use layaway if the fees were not attached.

Landmines in the Land of Layaway

The increasing number of major retailers reviving layaway illustrates the nation's continued economic struggles -- both among retailers (like Walmart, which had to bring back layaway to lure customers back) and among shoppers, many of whom now have fewer options for financing holiday purchases. Of course, some consumers may use layaway simply because they're decreasing their debt in these precarious times.

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Either way, investors should prepare for a difficult and highly competitive holiday season for retailers and think twice before buying some of the companies relying on layaway to boost holiday numbers. Similarly, investors holding certain weaker retailers may want to consider jettisoning them prior to the holiday season.

Sears Holdings, for example, has a lot to lose as its rivals add layaway programs. Its early decision to bring back layaway when the recessionary climate first hit boosted its holiday sales even though its overall business has been faltering for ages. Shoppers haven't been finding many compelling reasons to hit Sears and Kmart for their shopping needs during the rest of the year, so competitors' programs could give layaway fans one less reason to put Sears or Kmart on their holiday go-to lists.

Will the Bait Boost Sales?

Meanwhile, Walmart's not making the move to bring back layaway from a position of strength. It has been struggling to reinvigorate its U.S. sales for a while and admitted this year that many of its lower-income customers are living paycheck to paycheck more than ever. Walmart's aggressive return to layaway may be a sign of desperation.

Investors who are seeking a retail bargain stock can consider Target, which trades at just 12 times earnings. Although Walmart also trades at 12 times earnings, Target presents a better opportunity because of its more stable growth thesis. It tends to attract a more upscale customer who faces less serious budgetary struggles. Target's brand also enjoys a far more positive image than Walmart or Sears Holdings.

Regardless, the fact that the retail landscape is increasingly offering access to layaway programs is a sign of the times, and it's not a very optimistic one. Although layaway may help ring up additional sales from consumers who lack the discretionary income to buy items outright, it underlines many consumers' financial struggles. Additionally, the layaway fees seem to be acting as a deterrent to the programs in general.

Ultimately, I'm worried that this is a signal of a still-weakening retail climate and am hesitant to invest in a sector that is relying on what seem to be desperate measures for desperate times. Luring shoppers' dollars will likely be harder than ever in the land of layaway. Investors must pick their retail stocks carefully, since a climate with this much consumer strife means only the strong survive.

Motley Fool analyst Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Best Buy and Walmart Stores. Motley Fool newsletter services have recommended buying shares of Walmart Stores. Motley Fool newsletter services have recommended creating a diagonal call position in Walmart Stores.

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