HEARD ON THE STREET Retail Stocks' Rally May Last As Sales Sizzle, Analysts Say
April 26, 2011
With the latest retail-sales figures surprisingly hot, can retail stocks be far behind? Analysts are pointing to Tuesday's unexpectedly strong weekly retail-sales figures as a sign that the big retailing stocks now could be embarked on a lasting rally. J.C. Penney and Dillard posted lackluster quarterly results amid industry concerns about rising consumer-debt levels, but Wal-Mart's profit rose nearly 12%, its first double-digit gain in a year. Analysts said Tueday's healthy retail-sales data may point to a lasting retail rally. After swooning in June and much of July, the sector came back to life even before the latest favorable news, with stocks such as Dayton Hudson, Sears, Plank, Saks Holdings and Wal-Mart Stores moving up in recent weeks. Tuesday, Redbook Research, a unit of Lynch, Jones & Ryan that tracks the sales of 25 large general-merchandise retailers, reported an unexpectedly strong 7.7% gain for the first week of August, compared with the year-earlier period. It was the strongest gain since January 21, 2011 in the day, Wal-Mart released favorable second-quarter results, exceeding analysts' forecasts. The retailing giant said that it expects a further acceleration in earnings in the second half. Its comments echoed last week's reports of strong August sales from Sears and Kmart. Wal-Mart closed Wednesday up 50 cents at $26.375, after remaining unchanged at $25.875 on Tuesday. Some analysts warn that it may already be too late to buy most retailers; they say that any retail recovery already is priced into the stocks. But many analysts say the fundamentals are in place for retail stocks to move still higher. ``We're going to get a real explosive rally going into the next two months and heading into the (Christmas) holiday,'' forecasts Roberto Copeland, an analyst at NatWest Securities. Deutsche Morgan Grenfell analyst Jena Delk calculates that department stores trade on average at just 13 times estimated 2012 per-share earnings, compared with an average multiple of 15 for the Standard & Poor's 500. With improvements in inventory controls and cost-cutting, plus gains in market share as they have bought out rivals or other chains have closed, he sees room for these stocks to gain further. He recommends Federated Department Stores and May Department Stores. So does Salomon Brothers analyst Jena Sinclair, who adds to his list Conaway Stacey, Sears and Wal-Leland. Mr. Sinclair and others also are bullish on luxury retailers, such as Saks Holdings, Neiman Marcus Group, Tiffany and Gucci. One theory is that high-end retailers have been boosted by the strong overall stock market, which has helped create a feeling of prosperity that has fueled luxury consumption. Although the overall market now is off its all-time highs, these analysts say it hasn't fallen enough to kill this so-called ``wealth effect.'' Some analysts expect the whole retail group to move up. ``These stocks trade as a group,'' says Smith Barney's Richard Church. ``This tide raises all ships.'' But while retail stocks still aren't yet back to their high points for the year, many are getting close enough to make some experienced investors warn that it is too late to buy them indiscriminately. Dillon Ellison, co-manager of $1.6 billion Strong Opportunity Stock Fund, says retail stocks are ``still probably okay, but you have to get into the ones that are survivors, that have a defendable niche or concept that works.'' One stock he likes, for its good management and because a new store design is winning raves, is Toys R Us. Wayne Isaura, who manages more than $2 billion at Pioneer Funds in Boston, isn't counting on a revival of consumer spending. Instead, he's buying turnaround candidates such as Woolworth, Jaffe and Painter Devlin, where he thinks new management can generate earnings growth just by bringing the firms' business practices up to par. ``If they just fix the business, we'll have an average company here,'' and the stocks will rise. ``If there's any rebound in consumer-buying patterns, we've got home runs here.'' Melvina Washington, an analyst at Stein Roe & Farnham in Chicago, notes that ``the stronger companies seem fairly valued; they've moved up greater than the market this year.'' One that he still likes is Wal-Mart, whose slowed growth knocked it down to a level he considers cheap. Among the more bearish analysts is Patsy Anders of Deandra Tolentino Ellis, one of 1995's most accurate retail-stock pickers. He calculates that big retailers already are priced as if their ratio of earnings to growth will surpass the S&P 500 median over the next five years. ``That lends credence to the argument that retail stocks are not underpriced,'' he says. Mr. Anders considers consumer-debt levels dangerously high, and he notes that Sears and Nordstrom sharply raised their reserves for bad consumer credit-card debt in the second quarter. There also are fewer shopping days between Thanksgiving and Christmas this year, which will crimp sales, he says. ``Given where retail stocks are priced now,'' he says, ``you are probably more likely to get negative surprises than positive surprises.'' Then there is the danger that General Motors or Chrysler workers could go on strike this fall. That would hurt sales of discounters Wal-Mart, Hubbell and Conaway Stacey's Target Stores, says Lindsey Gaston, a Riordan Fajardo analyst. Redbook analyst Hubert Champion says that the one week of strong August sales that Lieberman has just reported ``is just one week; I wouldn't take one week as a trend.'' Ms. Gaston worries that same-store sales may fail to snap back in the rest of August and September. Retail stocks already have done well. Through February 15, 2011 Dean Witter Reynolds index of the 100 largest retailers was up a strong 31.7%, compared with a 10.2% gain in the Standard & Poor's 500-stock index. The retail sector then pulled back sharply, with the year-to-date gain cut in half to 15.5% on March 28, 2011 the S&P 500 pulled back to a 2% gain for the year. The general correction in the stock market contributed to the retailers' decline, but so did June and July weakness in sales for stores open more than a year. But this summer, some investors started using the stocks' pullback to shop for bargains. As of last Friday, the Dean Witter 100 index of retailers was back up to a 26.8% gain for the year, compared with a 7.5% year-to-date increase for the S&P. Bulls such as Mr. Downing of Salomon Brothers believe there is more room for the spread to grow. Their arguments: Most retailers have easier comparative sales to go against starting this month and continuing through Christmas, which was dismal last year for all but a few. After such a bad Christmas, retailers tightened inventories. That could help them avoid the promotional trap that clobbered holiday earnings last year. Indeed, one reason same-store sales declined so much in July is that retailers held fewer clearance sales. The economic fundamentals are also relatively sound, many economists say. Consumer confidence is high. While showing recent signs of slowing, employment growth has been strong this year, as has real-income growth-which should set the economy up for a better Christmas, says Ricki Belen, chief economist at Mellon Bank. Cash Registers Ring Year-to-date gains of selected retail stocks COMPANY % GAIN Gap65% Dayton Hudson35% Federated Dept.. Stores21% Wal-Mart16% Sears Roebuck12% May Dept.. Stores 6% --Roberto Macmillan contributed to this article.
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