What Retail Stocks Are Showing Growth in Spite of Flat Economic Renewal
Companies / Sector Analysis Aug 21, 2012 - 07:46 AM GMT
Buying in the retail sector continues to be selective, but we are seeing improvements as evidenced by the retail sales reading in July that pointed to a surprise 0.8% jump in total spending, which was well above the 0.2% estimate and the June reading of -0.7%. Excluding autos, sales jumped roughly 0.8%, which was also above the 0.3% estimate.
I’m impressed, as consumers are spending in spite of the continued lack of strong jobs growth. The creation of 163,000 jobs in July was positive, and, if jobs growth continues, it should help to drive consumer confidence and the desire to spend in the retail sector. This is crucial, as every dollar spent creates jobs and additional spending down the road in the retail sector.
Think about it this way: you go to a restaurant and have dinner. The restaurant attracts business so it can remain in business and hire workers. After you tip the waiter, he now has extra income to spend on goods and services. The waiter then goes and buys a shirt at the department store. The sales clerk ringing in the sale earns a wage and possible commission on the shirt. In turn, he or she goes out and spends, and so on; hence the importance of the multiplier effect in the retail sector. Some economists estimate that each dollar initially spent can generate up to $7.00 in consumer spending in the retail sector, which is why it is crucial consumers spend to get the economy going.
I cannot say I’m a big supporter of the retail sector, but the conditions have improved and will likely get better. The key is buying the retail stocks that show growth in spite of flat economic renewal, whether they are big-box stores, discounters, or luxury retailers.
Luxury retailers continue to fare well, but even these companies are facing some spending hurdles. One of the top high-end retailers at this juncture is Michael Kors Holdings Limited (NYSE/KORS), which traded at a new 52-week high last week following an impressive fiscal first quarter, in which it beat consensus earnings per share (EPS) estimates by $0.14 per diluted share or 70%. Michael Kors beat earnings by 122% and 37.5% in the fiscal third and fourth quarters.
Tiffany & Co (NYSE/TIF) and Coach, Inc. (NYSE/COH) are high-end luxury stocks well down from their 52-week highs, but perhaps ripe for some oversold buying at the sale prices. The problem is that these stocks could move lower.
On the other end of the retail sector spectrum, discount stores, such as Dollar General Corporation (NYSE/DG), Dollar Tree, Inc. (NASDAQ/DLTR), Family Dollar Stores, Inc. (NYSE/FDO), and Wal-Mart Stores, Inc. (NYSE/WMT), are outperforming in the retail sector. But if you want the smaller variety, PriceSmart, Inc. (NASDAQ/PSMT) is worth a look.
In the growing global jeans market, including China and India, American Eagle Outfitters, Inc. (NYSE/AEO) and The Gap, Inc. (NYSE/GPS) are near 52-week highs.
An up-and-coming maker of jeans in both the lower- and high-end space that is interesting is True Religion Apparel, Inc. (NASDAQ/TRLG). The stock traded at a 52-week high of $37.82 prior to getting slammed by investors in February when the company reported a shortfall in its fourth-quarter earnings. The company has since come back beating EPS estimates in the first and second quarter. Trading at 11.3X its 2013 EPS, the stock is attractive, versus the 15.5X assigned to The Gap.
The key to investing in the retail sector is to search for a company that offers some sort of niche or a product that differentiates it from its competitors. I also like to look at retailers that may currently be in the dumps with investors, but have strong brand awareness in the retail sector.
By George Leong, BA, B.Comm.
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