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Retail stocking stuffers
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November 23, 2001: 4:25 p.m. ET
Retailers can't count on big spenders this holiday season. But don't count out the whole sector.
By Paul R. La Monica
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NEW YORK (CNN/Money) - Black Friday -- the start of the holiday shopping season, and millions of early-rising consumers have flocked to the malls in search of Microsoft's Xbox, Harry Potter tchotchkes, and various other goodies. And though the full tally won't be in for a while, investors seem to be feeling hopeful that holiday sales won't be so bad for the retailers after all.
The S&P Retail Index gained 1.6 percent on Friday, and the group has rallied 29 percent since Sept. 21, the low-point for the stock market overall. In October, retail sales gained a healthy -- and surprising -- 7.1 percent from September.
Still, investors need to tread cautiously. The recent strength in sales was driven largely by huge incentives by auto manufacturers, and the economy remains much weaker than it was this time last year. According to a survey by Myvesta.org, the average holiday shopper plans to spend $773 on gifts, down from $1,220 last year. "There is no doubt that we are in a recession and this is going to hurt the holiday," said Gerald Hirschberg, retail analyst at Standard & Poor's during a teleconference on Tuesday.
According to Thomson Financial/First Call, earnings for broadline retailers (a group that includes department stores and discount chains) are expected to increase just 4 percent this quarter from a year ago. Earnings for apparel retailers (such as The Gap and Abercrombie & Fitch) are estimated to decline by 16 percent.
That's all the more reason why investors need to focus on companies that are still demonstrating an ability to generate earnings gains in this tough environment. Here's a look at five that are doing just that. They have already started to run, but they may continue to buck the trend.
Target
"Discounters will fare the best not only this weekend but the season overall. Consumers are looking for value," says Jeff Stinson, a retail analyst with Midwest Research in Cleveland. To that end, he thinks Target appears to be a safe bet. Target's third-quarter profits increased by 5 percent on a year-over-year basis and analysts are predicting earnings growth of 6.6 percent growth for Target (TGT: up $0.95 to $37.71, Research, Estimates) in the fourth quarter. And next year, growth is slated to increase by 13.5 percent.
And even though the stock has enjoyed a nice run the last two months -- up 41.5 percent -- it is still attractively priced, trading at 22.5 times earnings estimates for next fiscal year.
Kohl's
Another retailer that has been performing solidly is Kohl's, which operates a chain of discount department stores (higher-end than Wal-Mart but not as high-end as say, a Nordstrom's) in the Midwest and East Coast. The company reported a gangbuster third quarter -- profits jumped 31 percent from the same quarter a year ago. And analysts expect Kohl's to post a 19.2 percent gain in earnings this quarter.
However, the stock is by no means a bargain, having soared 50.9 percent since September 21. Kohl's (KSS: up $1.81 to $67.73, Research, Estimates) trades at a significant premium to Target, at 40.3 times earnings estimates for next fiscal year. Stinson is still a fan of the stock though due to its high growth outlook. Analysts are predicting that Kohl's earnings will increase 21.7 percent in its next fiscal year, and at an average of 24 percent annually for the next three to five years.
Family Dollar Stores
Going further down the discount chain, Family Dollar Stores is worth a look, says John Escario, co-manager of the Rydex Retailing Fund, which counts the stock as its tenth largest holding. Family Dollar's stores are typically much smaller than the superstores operated by Wal-Mart and Target and have a stronger focus on staple items such as food, health and beauty aids and other household products. "It's been a pretty successful niche format and they offer nice price points," says Escario.
The emphasis on value has made the stores a hit with low and middle-income consumers and the relatively low overhead has enabled Family Dollar (FDO: up $0.17 to $30.60, Research, Estimates) to post solid earnings gains. Profits increased by 11 percent in the company's latest quarter and are expected to jump 20.8 percent in the current quarter (which ends in November). The stock is also extremely attractive, trading at just 21.5 times earnings estimates for next fiscal year, versus a projected long-term growth rate of 20 percent.
Best Buy
Escario also likes Best Buy, terming it the 'category killer' in consumer electronics. The release of Xbox and Nintendo's new console, the GameCube, should bode well for Best Buy. Analysts expect a strong fourth quarter, with a projected earnings increase of 25.9 percent.
That bullish outlook is a big reason why the stock has skyrocketed 57.2 percent in the last two months. This huge run-up might give some investors pause but Best Buy (BBY: up $0.85 to $68.22, Research, Estimates) is still trading at 25.8 times next year's earnings estimates, reasonable given long-term earnings growth of 20 percent.
Too
Although investors would be wise to avoid most specialty apparel retailers, Stinson thinks one in particular looks like it might be able to continue doing well. Too, a spin-off from Limited that sells apparel for young girls, is expected to report a 15.2 percent increase in earnings in the fourth quarter.
Analysts estimate that earnings will grow 17 percent next fiscal year and 20 percent annually over the long-term. Too (TOO: Research, Estimates) has been on a major tear as of late, shooting up 50.7 percent in the past two months, yet it still trades at just 20.7 times next year's fiscal earnings estimates. Of course, specialty apparel is a highly risky area, especially when it comes to the vagaries of teen fashion (just ask the Gap). But at its current valuation, Too appears worth the risk. 
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BUCKING THE TREND
