NEW YORK (CNN/Money) -
After they digested their turkey dinners, Americans hit the malls in full-force and brought their wallets with them.
According to a survey from retail consulting firm ShopperTrak RCT, sales on Black Friday (the day after Thanksgiving) were up 12.3 percent from last year while sales on Saturday increased 9 percent. (For more about retail sales, click here.) But does this mean that retail stocks will continue to have a happy holiday season?
On Monday, at least, the answer was yes. The S&P Retail Index was up slightly. It has rallied more than 15 percent since the market's Oct. 9 low point. A handful of retailers have done even better. Shares of discount chain Target, for example, are up 30 percent since Oct. 9, while Best Buy and Toys R Us are each up more than 50 percent.
But it looks like the only discount associated with retailers these days is the merchandise you'll find in the stores. Most of the stocks are no longer cheap.
Waiting for prices to come down
Retailers with a market value of at least $1 billion are trading at an average of 21.1 times earnings estimates for next year according to Baseline. That's a premium to the market, which is trading at about 18 times 2003 earnings estimates.
| * Since Oct. 9 . **Based on estimates for next year. | | Sources: Baseline, Standard & Poor's |
|
To be sure, stronger-than-expected holiday sales by the likes of Wal-Mart and J.C. Penney are a good sign for the economy. Consumers are holding up after all, despite concerns about increased debt loads and fears about a possible war in Iraq.
"Most of the noise about the consumer stopping spending has been just noise. There hasn't been real evidence of it," says Kent Mergler, president of Northstar Capital Management and manager of the Fremont New Era Growth fund.
Mergler owns Wal-Mart, Kohl's, AutoZone and Bed Bath and Beyond in his fund but he says that he is not looking to add any other retailers to his fund at this point.
Still, strong sales won't necessarily translate into equally robust earnings gains, cautions Ulysses Yannas, a retail analyst with Buckman, Buckman & Reid, a New York-based brokerage firm that does not have an investment banking business. Yannas does not own any of the stocks he follows.
Yannas says that one reason retail sales might be better than expected is because of the big promotions and discounts chains are using to lure consumers into their stores. If retailers are too aggressive, that could hurt earnings. "Many retailers have gone through the season constantly lowering prices. Sure, you create sales but at what cost?" says Yannas.
What about next year?
William Batcheller, a senior portfolio manager for National City Investment Management, subadvisor for the Armada family of mutual funds, says he'd be wary of buying more retail stocks as well. He does own Wal-Mart, Lowe's, Home Depot and TJX in some of Armada's growth funds but admits that valuations are starting to get a little stretched.
He adds that it's premature to declare this holiday season a big success just because of one strong weekend, especially since this year's shopping season is six days shorter than last year's due to how late Thanksgiving was. "We want to get a better view of what the full results are going to be for retailers. We're still nervous about the consumer," he says.
And even if the fourth quarter brings tidings of comfort and joy to retailers, there is still concern about how the group will do next year. To that end, consensus 2003 earnings estimates for retailers with a market value greater than $1 billion have been cut by an average of 2.5 percent during the past three months.
In other words, many pricey retail stocks are probably going to be better bargains after the holidays.
|
