Retailers Already Planning For A Merry Christmas

10/24/2016


When I worked as an analyst for a major book retailer in the early 2000s, Christmas took on the importance it does for a five-year old child. The holiday determined whether the past year was a success, and it dominated our thoughts long before, and after, Dec. 25. We would start ordering Christmas merchandise into our warehouses in August and clean up the mistakes of overly optimistic expectations the following February, returning unsold books to the publishers.

With Halloween nearly upon us, holiday merchandise should begin hitting store shelves any day. It seems reasonable for investors to anticipate a dose of holiday cheer this year.

U.S. retail sales are projected to rise 3.6% in November and December, according to industry researcher National Retail Federation, up from 3.0% growth last year and average growth of 2.5% over the past decade. Online sales are expected to rise 7% to 10% over the holidays, potentially accounting for up to 18% of total retail sales. Internet sales climbed 9% last year.

The tighter labor market could cause costs to rise for retailers as they compete for a shrinking pool of seasonal workers. Consumer confidence also took a hit earlier this month, as the University of Michigan Consumer Sentiment Index slipped to its lowest level in 13 months.

However, retail stocks offer some compensation to investors willing to take on those risks. S&P 500 Index retail stocks trade at 18 times estimated current-year earnings. Compared to the rest of the S&P 500, which averages a current-year P/E of 19, the industry looks modestly cheap. Retail stocks currently trade at a 5% discount to the broad index, versus their average 1% premium over the past 12 years.

The industry's growth profile also looks favorable, with the consensus projecting average per-share-profit growth of 8% this year, versus the index's average of 5% growth. Encouragingly, profit estimates have ticked higher in the past 90 days for more than 60% of S&P 500 retail stocks.

We recommend seven consumer-discretionary stocks, but just one traditional retailer: Foot Locker ($68; FL). The stock offers solid growth prospects, with per-share profits expected to rise 13% and revenue 6% in the second half of fiscal 2017 ending January. Its shares have surged 24% since June but still look cheap at 15 times trailing earnings. Foot Locker is a Buy and a Long-Term Buy.

Retailers hope to ring in higher holiday sales
The National Retail Federation forecasts 3.6% higher holiday sales (November-December) in 2016. Data exclude automobile, gasoline, and restaurant sales.
Year
Holiday Retail
Sales Growth
(%)
2002
2.1
2003
5.1
2004
6.8
2005
6.2
2006
3.3
2007
2.6
2008
(4.6)
2009
0.3
2010
5.2
2011
4.6
2012
2.7
2013
2.7
2014
4.1
2015
3.0
2016 *
3.6
Source: National Retail Federation.  * Estimated.  

 


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