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Retail forecast: A brighter Christmas
The sector's prospects have improved, but analysts fret about '04 and stock valuations.
September 4, 2003: 2:11 PM EDT
By Parija Bhatnagar, CNN/Money Staff Writer

NEW YORK (CNN/Money) - Retailers are breathing easier these days. With robust back-to-school sales and solid second-quarter profits, the battered sector has turned the corner.

July traditionally is a slow month for retail sales, but consumer spending soared above analysts' expectations for the month, raking in the biggest gain in more than a year.

In addition, second-quarter profits trounced Wall Street's estimates. Analysts at the beginning of the quarter expected earnings would grow just 7 percent -- the final tally is more like 12 percent, according to First Call. That also beat the 9.6 percent earnings growth for the S&P 500.

The rest of the year looks promising, too. Michael Niemira, senior economist with Bank of Tokyo-Mitsubishi, forecasts second-half sales at stores open at least a year (same-store sales) to grow about 2 percent, up slightly from the first half of the year, and flat from a year ago for the same August to January period last year.

And the holiday shopping period likely will look good, after merchants last year suffered the worst Christmas in 10 years. Richard Hasting, retail economist with Bernard Sands, anticipates that holiday sales will surpass last year's results by 1.5-to-2 percent, primarily because of easier comparisons.

Beware the retail stock rally

But is that enough growth to support the big run in retail stocks? The Standard & Poor's retail index is up 38 percent year-to-date, compared to 14 percent for the S&P 500.

True, retail profits are expected to grow a healthy 14 percent in the third quarter and 16 percent in the fourth.

But Hastings, for one, is worried about what comes next. "Retail sales can weaken again early next year," he warned. "The refi market is over, so spending on durable goods such as furniture, electronics and other non-durable goods will deteriorate."

Kurt Barnard, an independent retail consultant, also is concerned. "As in most of the cases here [referring to the retail stocks mentioned], the numbers look better because of cost-cutting and not real topline growth," said Barnard. "Let's wait until next year to see if the fundamentals have actually improved."

Here's a look at some of the top-performing retail stocks.

Sears. The best-performing stock in the S&P retail stock index is Sears, up 83.8 percent year-to-date. The stock trades at 9.6 times estimates for this fiscal year.

The Hoffman Estates, Illinois-based retailer, the fifth largest in the United States, in July announced it would sell its credit-card business to Citigroup Inc. (C: Research, Estimates).

"The sale of the unit removes the erratic component of its earnings," said Bill Dreher, analyst with Deutsche Bank Securities. And investors appear to have bought into the company's turnaround efforts, which include revamping its key home appliance division and opening of off-mall stores called Sears Grand.

But the company is still fighting fierce competition from discounters Wal-Mart and Target (TGT: Research, Estimates), and has reported 23 straight months of negative same store sales. Dreher rates shares of Sears (S: Research, Estimates) a "hold" with a $30 price target, below its price of $46.25 Wednesday.

Fred's. In the discount segment, shares of the Memphis, Tenn.-based Fred's Inc. (FRED: Research, Estimates) have risen a whopping 109 percent year-to-date. However, with the stock trading at a lofty 41.5 times this year's earnings, short-interest activity on Fred's stock recently has crept back near its third-highest level of the year.

Wal-Mart. Meanwhile, shares of Wal-Mart Inc. (WMT: Research, Estimates), the world's No. 1 retailer, are up 19 percent this year and are just shy of their 52-week high of $59.17. Its P/E is 29.2, a premium to the sector P/E of 23.5.

Mark Mandel, analyst with Blaylock & Partners, has a "hold" rating on Wal-Mart and a $55 price target. "The stock is not cheap and it has lagged the S&P retail index this year. Wal-Mart is a great company with predictable sales and profit performance. But recently the numbers look good because of easier comparisons."

Best Buy. Best Buy (BBY: Research, Estimates) led the consumer electronics group, with the stock up 115 percent year to date and a P/E of 22.5. The company has consistently outperformed its closest rival, Circuit City (CC: Research, Estimates), as gross margins have improved from better cost controls and increased sales of higher-priced products such as digital TVs.

Aeropostale. Among the apparel names, New York-based teen specialty retailer Aeropostale (ARO: Research, Estimates) saw its stock rise 165 percent year-to-date, with a P/E of 21.7. Brian Tunick, analyst with J.P. Morgan, has a "neutral" rating on the stock and says the company still faces tough same-store sales comparisons from a year-ago but is showing better inventory control and gross margins.

Some of the retail laggards include J.C. Penney (JCP: Research, Estimates), down 7.8 percent year-to-date, and footwear shoe retailer Payless Shoe Source (PSS: Research, Estimates), down 14 percent this year.  Top of page


-- analysts quoted in the story do not own shares of the companies mentioned in the story, but in some instances their companies do have investment banking relationships with the companies that they cover.




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.