Today is the big day for you shoppers! It’s Black Friday, and the retail sector is hoping you have the “shop until you drop” mentality this year. Retail heavyweights Wal-Mart Stores, Inc. (NYSE/WMT) and Target Corporation (NYSE/TGT) are two major retailers that decided to open their doors Thursday night and enter the Black Friday shopping window earlier.
At stake are billions of dollars and the potential to give the retail sector a significant boost in the fourth quarter.
The post-Thanksgiving shopping season for the retail sector is critical. Retail sales have increased in three straight years and hopes are for another great year. (Read “Why the Market Needs a Big Black Friday.”)
Yet there is some caution. The National Retail Federation (NRF) is estimating that the retail sector could see sales jump 4.1% in the November to December period, versus 5.6% during the same period last year. The slower estimated growth could be due to the uncertainty of the fiscal cliff, and its impact on spending and the economic recovery. Consumers don’t like uncertainty.
So when you are shopping today at the stores or online, keep in mind that every dollar you spend will help America’s ability to expand as we head into 2013.
The question is: which will be the best retail stocks this holiday shopping season? My feeling is that buying in the retail sector continues to be selective and somewhat cautious, as evidenced by the retail sales reading in October that pointed to a 0.3% decline in total spending, worse than the market estimates and the 1.3% reading in September.
While the readings in the retail sector don’t blow me away, I’m encouraged by the ability of consumers to spend in spite of the lack of strong and sustained jobs growth. We are seeing some jobs growth and a lower unemployment rate, which should help to drive consumer confidence and the desire to spend in the retail sector. This is critical, as every dollar spent creates jobs and additional spending down the road.
The key is to buy the retail stocks that show growth in spite of flat economic renewal, whether they are big-box stores, discounters, or luxury retailers.
In the high-end market, luxury retailers are faring well, but even these companies are facing some spending hurdles. Michael Kors Holdings Limited (NYSE/KORS), Tiffany & Co. (NYSE/TIF), and Coach, Inc. (NYSE/COH) are high-end brands that are rallying from their 52-week lows and are perhaps ripe for some buying at the current levels. All three companies are also plays on China’s retail sector, where brand buying is significant and growing.
At the other end of the spectrum, discount stores such as Dollar General Corporation (NYSE/DG), Dollar Tree, Inc. (NASDAQ/DLTR), Family Dollar Stores, Inc. (NYSE/FDO), and Wal-Mart are outperforming in the retail sector. On the smaller side, PriceSmart, Inc. (NASDAQ/PSMT) has already returned some impressive gains and is worth a look.
In the growing global jeans market, American Eagle Outfitters, Inc. (NYSE/AEO) and The Gap, Inc. (NYSE/GPS) are near their 52-week highs. An interesting up-and-coming maker of jeans in both the lower-and high-end space is True Religion Apparel, Inc. (NASDAQ/TRLG). The stock traded at a 52-week high of $37.82, prior to getting slammed by investors on February 10 when the company reported a shortfall in its fourth quarter-earnings; in my view, this isn’t a major concern as long as a pattern doesn’t emerge.
The key to stock market success in the retail sector is to search for companies that offer some sort of niche or a product that differentiates it from its competitors. I also like to look at retailers that may be currently in the dumps with investors, but have strong brand awareness.