View Market Through Showroom Window

12/23/2013


Retailers set up shop at the sharp end of the economy.

When the pain comes, sellers of discretionary items can feel it before everyone else, because consumer spending accounts for about 70% of U.S. gross domestic product and retail sales are a direct reflection of consumer-spending trends. Over the last four decades, retail sales have been highly correlated with GDP, meaning that when one rises, the other tends to rise.

Retail sales excluding automobiles and gasoline declined during the recession, with the trough in March 2009 5.7% below the July 2008 high. Last month, sales topped $304 billion, 22% above the March 2009 low. Retail sales have risen well above prerecession highs because of the persistent health of consumers, who so far have led the economic recovery.

In the 12 months ended November, retail sales rose 4.1% from the same period a year earlier. Growth has slowed from the 5%-plus seen in late 2011 and most of 2012 but isn't far short of 4.5%, the 20-year average. With the consumer price index up 1.2% over the last 12 months, well below the 20-year average inflation rate of 2.4%, real growth in retail sales is stronger than the headline number implies.

Super-strong retail sales are not necessary for retail stocks to do well. Since the start of 1995, the S&P 1500 Retailing Group Index has averaged a gain of 19% in the year after trailing-12-month retail sales rose 4% to 5%.

At the moment, retailers look attractive. Food & staples retailers average Quadrix® Overall scores of 71, while retailers of discretionary products average 67, ranking them fourth and sixth, respectively, among 24 groups Standard & Poor's uses to segment the market. Retailers with solid year-ahead potential include Bed Bath & Beyond ($77; BBBY), CVS Caremark ($67; CVS), Foot Locker ($39; FL), Kroger ($40; KR), and Macy's ($52; M).


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