Retailers' Christmas May Be Merry

11/29/2010


While the International Council of Shopping Centers projects the strongest holiday-sales growth in four years, October results suggest the ride may not be smooth.

Same-store sales for an index of 28 retailers tracked by Thomson Reuters rose 1.6% in October, in line with the consensus, on top of 1.8% growth last year. That marks 14 straight months of higher same-store sales, but the lowest gain since April. Discounters and luxury retailers performed well, while department stores, drug stores, and teen retailers fared poorly.

Unseasonably warm weather dampened demand for warmer clothing, accounting for some of the weakness in October. Demand for warm clothes should pick up in November, but the weather-driven buying trend illustrates how consumers now shop closer to need. Today's more-disciplined consumer has seemingly adopted a new attitude: To buy is to wear.

While consumers have improved their savings habits and tidied up their personal balance sheets, consumer confidence remains low, weighed down by persistent fears of a sluggish economy and an unemployment rate that remains stubbornly above 9.5%. The University of Michigan Consumer Sentiment Index stood at 69.3 in November, up slightly from last month but well below the 80.9 seen in October 2007.

Stores noted heavier traffic and more transactions in October. But lower prices tempered results as promotions played a heavy role in sales growth.

Reliance on discounts, usually reserved until after Thanksgiving, suggests retailers are buying their way to higher sales. Among the 108 retail stocks in the S&P 1500 Index, only 18 reported lower sales in their most recent quarter, though 44 saw their gross profit margin contract.

A few companies managed to grow sales without sacrificing profit margins. Advance Auto Parts ($66; AAP) increased sales by 11% and Ross Stores ($65; ROST) by 7% in their most recent quarters. Both companies expanded their gross margins by more than 80 basis points, or 0.8%.

For the holiday season, which combines November and December, U.S. chain stores should grow same-store sales 3% to 3.5%, the highest rate since 2006, according to the International Council of Shopping Centers. These months often account for up to 40% of a retailer's annual revenue.

Retailers will likely continue to use aggressive promotions to attract shoppers. Getting a jump on the holiday season, Wal-Mart Stores ($54; WMT) slashed prices on toys weeks before Halloween and began offering free shipping for online purchases — without a minimum purchase — through Dec. 20. The discounter also vowed to match any rival's price on the Friday after Thankgiving.

Hopefully, cautious inventory management will prevent the 2008 disaster, when holiday sales slumped nearly 6% as stores slashed prices to move excess merchandise. On a per-share basis, the S&P 1500 Index retail sector's inventory is up 5.7% from last year but still down 4.6% from 2008's overly high levels.

FORECASTS RETAIL STOCKS
Below are listed the 15 retail market leaders on our Monitored List. An “A” rating means above average, “B” is average, and “C” means below average. We recommend just four of the stocks for purchase — all are presented in bold.
Est. EPS
— Growth —
Company (Price; Ticker)
Curr.
Quarter
(%)
Next
Fiscal
Year
(%)
P/E On
Next-
Year
EPS Est.
YTD
Return
(%)
Quadrix
Overall
Score *
Retail
Industry
Rating
Advance Auto
($66; AAP)
50
16
14
65
92
Automotive
A
Amazon.com
($170; AMZN)
4
39
49
27
46
Internet
C
Best Buy ($45; BBY)
30
10
11
15
91
Electronics
A
Costco ($67; COST)
13
14
18
15
64
Super Centers
B
CVS Caremark
($31; CVS)
7
7
11
(3)
62
Drug
B
Home Depot
($31; HD)
13
14
14
10
46
Home Improve.
C
Kohl's ($55; KSS)
15
17
13
3
80
Department Store
B
Lowe's Cos.
($22; LOW)
21
16
14
(3)
51
Home Improve.
C
McDonald's
($80; MCD)
13
9
16
30
77
Restaurants
A
Ross Stores
($65; ROST)
3
9
13
53
91
Apparel
A
Starbucks
($31; SBUX)
26
15
18
36
85
Restaurants
A
Target ($56; TGT)
12
13
13
17
81
General Merch.
A
TJX Companies
($46; TJX)
(1)
10
12
28
87
Apparel
A
Walgreen
($35; WAG)
2
15
12
(3)
75
Drug
A
Wal-Mart Stores
($54; WMT)
13
10
12
4
85
Super Centers
A
* Quadrix scores are percentile ranks, with 100 the best.

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