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The Retail Sector’s Winners and Losers This Holiday Season

Companies / Sector Analysis Nov 27, 2010 - 08:51 AM GMT

By: Investment_U


Best Financial Markets Analysis ArticleMarc Lichtenfeld writes: Forget the breathless buildup to Black Friday – the much-ballyhooed Thanksgiving sales event.

In an effort to pre-empt the frantic holiday shopping season, America’s retailers are already in full-on sales mode, having instituted “Black November” instead.

With the economic recovery still limping along, retailers are fighting for every nickel of consumer spending. And given that the holiday season accounts for as much as half of retailers’ annual revenue, many have lengthened the shopping period in a bid to jolt sales early and ease some of the pressure. Big sales events have attempted trying to lure shoppers into purchasing flat screen TVs and apparel before they even bought their turkeys and sweet potatoes.

I suspect the aggressive marketing and early sales will pay off and retailers will have a better than expected fourth quarter. But from an investment standpoint, who will be the winners and losers?

Solid Sales Across the Retail Sector’s Map

Having seen a lull in the spring, retail sales have trended higher since then. Same-store sales (those open a year or more) were up 1.6% in October, according to Thomson Reuters.

And the sales growth was spread across different areas of the retail sector, too. For example, luxury stores had a good month, with Saks Fifth Avenue (NYSE: SKS) reporting same-store sales growth of 8.1%, while Nordstrom’s (NYSE: JWN) sales climbed by 4.8%.

Discount stores like Costco (Nasdaq: COST) also performed very strongly. Apparently, there was a lot of pent-up demand for massive jars of pickles and pallets of paper towels, as the wholesale store racked up same-store sales growth of 6%.

And there’s probably plenty of pent-up demand in other parts of the economy, too…

Americans Slimming Down This Holiday Season

Over the past year, Americans have shed $1 trillion worth of debt. For example, credit card debt is 16% lower. And mortgage default rates fell by 3.6% in October, compared with September – and were 36% lower than October 2009.

Times are still tough for many people, of course. Those with jobs or comfortable retirements have scaled back their spending over the past few years out of fear, guilt, or both.

But the pickup in luxury retail sales, in particular, is evidence that this is starting to come to an end. And with lower credit card balances, refinanced mortgages and little inflation, believe it or not, there are consumers who are better off than they were a year ago, or more flush than they’ve ever been. And they’re likely to spend more money this Christmas.

Question is: Where will they spend it?

This Year’s Retail Sector Winners

I believe the recent retail sales trend will continue and the following companies will fare well over the coming weeks…

•Costco: While many other stores scrap with each other over doorbuster sales, particularly on Black Friday, Costco tends not to rely on gimmicks to get shoppers in the door. While it will certainly have Black Friday specials, consumers who shop there do so because they know they get good value for their money on the products, coupled with a pleasant shopping experience. Furthermore, Costco’s management is among the best in the business.
•Tiffany’s (NYSE: TIF): In the luxury space, I like Tiffany’s. Sales of luxury goods should do well, especially given that the stock market is higher than at this time last year. Analysts expect luxury department stores to see growth of 6% to 8% in November and December.
Note: Tiffany’s reported its third quarter earnings this morning, just before we went to press.

And as for the losers…

Those Darn Kids

I’m not a huge fan of the teen retailers this year.

Teen unemployment is 27.6%. And those that are working are making 30% less than their counterparts did three years ago. While Moms and Dads still fund their teenagers’ shopping sprees, the bleak teen employment scene will certainly put a crimp in retailers’ sales figures. Bummer!

And if you’re looking for stores that might struggle, look no further than…

•Hot Topic (Nasdaq: HOTT): This is one of my least favorite names in the retail sector. The company reported a dismal 8.5% same-store sales decline in October and lowered its earnings guidance as a result. In addition, the company announced that it will close 40-50 of its 680 stores and lay off roughly 14% of its workers.
While other laggards like Pacific Sunwear of California (Nasdaq: PSUN) have taken steps to improve their merchandise, there’s no evidence that the same is happening at Hot Topic.

I also believe that the “Three A’s” will struggle…

•Aeropostale (NYSE: ARO)
•Abercrombie & Fitch (NYSE: ANF)
•American Eagle Outfitters (NYSE: AEO)
All three will be at each other’s throats this season, thus creating too much competition to pick one winner. As a result, I expect all three to log a mediocre performance at best.

On Tap This Holiday Season: Retail Therapy

For two years, Americans have contended with the near-collapse of the financial system, a severe recession, a bitter, nasty election and a seemingly endless barrage of bad news and negativity. Not to mention being groped at the airport on the way to visit ‘Nana.

But if anecdotal evidence is any indicator, stores and malls are already busy. Many friends, family members and colleagues have reported brisk business for retailers.

This holiday season, with the economic climate just starting to warm up a bit, I expect people to put the gloom and doom aside and celebrate the holidays with more gusto.

Hoping your longs go up and your shorts go down,

Marc Lichtenfeld

P.S. Feel free to leave anecdotes of your holiday shopping experiences below. What stores in your area are busy? Which ones have tumbleweeds blowing through them?

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