advertisement
Christmas came early for retail stocks.
They started rolling in August, going on a run that sent the S&P Retail Index (RLX.X) spiraling upward 19% by the end of October.
But then, earlier this month, worries surfaced after sector bellwether Wal-Mart Stores (WMT, news, msgs) and other chains reported surprisingly weak October sales growth.
So are the retail stocks headed into the tank now? Not so fast. The reason: solid job and income growth. The nation has tacked on a million jobs in the three months through the end of October, according to household surveys. Unemployment has retraced to a low 3.9% for adults and 1.9% for anyone with a bachelor's degree or higher, points out Oak Associates' chief investment strategist Ed Yardeni. Real disposable personal income rose 3.9% in the third quarter, the strongest since late 2004.
No one is guaranteeing a repeat of the August-October run, of course. But a strong consumer and solid holiday sales should propel the year's big winners -- J.C. Penney (JCP, news, msgs), Kohl's (KSS, news, msgs), Crocs (CROX, news, msgs) and Guess? (GES, news, msgs) -- soaring even higher.
If the already-hot stocks scare you, there's another option. Continued consumer strength should also help beaten down -- but recovering -- retailers like Williams-Sonoma (WSM, news, msgs), Urban Outfitters (URBN, news, msgs) and Finish Line (FINL, news, msgs).
"We are in very good shape going into the holiday season," says Arun Daniel, senior research analyst for ING Investment Management, who is counting on J.C. Penney and Kohl's to produce more gains in his portfolios. "Inventories are lean. We like that."
Here's a closer look at why investors should like retail stocks today.
Revenge of the department stores
For years, shoppers and investors have dissed department stores as so yesterday. But 2006 has rewarded for the patient investors who stuck it out. Efforts to get a little more hip and consolidation in the sector this year have jump-started names like J.C. Penney and Kohl's. Despite gains of around 45% so far this year for both stocks, they have further to go, says Romeo Dator, a portfolio manager at U.S. Global Investors.Daniel thinks J.C. Penney will continue taking market share from Federated Department Stores (FD, news, msgs), which has been closing doors in the May Department Stores chain it purchased last year. Federated is also upgrading its May stores to Macy's -- a move that may alienate price-conscious May shoppers.
More from MSN Money
Meanwhile, J.C. Penney has been getting more fashionable with labels like St. John's Bay, Arizona and Chris Madden, says Dator, a move that has boosted sales growth. "People are willing to spend money at J.C. Penney if the fashion is correct," he says. More recently, the chain has been teaming up with a popular line of cosmetics known as Sephora. "We have already seen good results from that," says Daniel. Another source of growth: The company plans to add 175 off-mall stores by 2009 on a current base of about 1,000 stores.
Kohl's has recovered from a disastrous style miss that left inventories bloated in 2003. It's now getting the fashion right with brands like Chaps, Candies and Tony Hawk, says Dator. He's looking for a repeat when Kohl's introduces a clothing line under the Vera Wang name in late 2007.
2 stocks on a roll
Remember the Ugg boot that helped quadruple shares of Deckers Outdoor (DECK, news, msgs) in the past four years?A similar craze is now goosing another footwear stock. But this time it's for a colorful -- if ugly -- assortment of clogs, sandals and boots called Crocs. White-hot demand for Crocs, described by some as "the ugliest footwear you will ever fall in love with," has sparked a double in the shares of Crocs from lows earlier this year.
Why are Crocs so popular? They are made from a proprietary resin called Croslite, which softens with body heat and moulds to your feet, which devotees say makes the shoes extremely comfortable.
The popularity of the funky footwear has befuddled naysayers who have been betting against Crocs' stock for months -- and losing. The chief argument against the stock has been that hype has driven its price to undeserved levels, particularly when compared to competing footwear makers like Deckers or Timberland (TBL, news, msgs). The problem with that complaint is that Crocs keep selling, pushing the company's results into territory that does support the valuation, says Brian Miles, a research analyst at Emerald Advisers.
"None of those other companies have the same growth characteristics," he says. Despite the robust strength of Crocs, Miles is looking for more gains from a rollout to California and Florida, the introduction of new styles that broaden its customer base, and growth overseas.
Rate this Article
High
