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Rising fuel prices can take a bite out of retail sales. Here is a select group of merchants that should be able to prosper.
By Parija Bhatnagar, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) - If investors are running away from retail stocks due to rising gas prices, they could be making a mistake.

Industry analysts say fuel price hikes combined with rising interest rates tend to "alter" shopping behavior, but not stymie it altogether. In other words, consumers aren't really shopping less, they're just shopping differently.

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Love Goel, CEO of Growth Ventures, an investment firm focused on retailers, called it a "trading down" phenomenon.

"In this environment sales of big ticket items take a hit," Goel said."Instead of buying that new bedroom set, people will now buy a rug or another smaller purchase that's more cost-efficient but still makes them feel good."

Three types of stores and brands benefit from this trading down pattern, he said. First, merchants that focus on moderately-priced accessories. Second, merchants that stock necessities. And third, chains that can attract customers with various income levels.

Based on those guidelines, here are five stocks that could do well despite high prices at the pump.

-- Nike. The world's largest shoemaker has something for everyone at various prices. So when last year's gas woes crimped consumers' budgets, Nike (Research)'s footwear sales in the U.S. were actually quite robust, Citigroup analyst Kate McShane wrote in a recent note.

Even if consumer spending slows down, people will still need to buy new shoes "but [they] may trade down to lower-priced brand."

And some of Nike's highest-priced footwear may not be affected at all by a spending slowdown, she said, since higher-income consumers are not as influenced by gas prices.

Nike shares are down 10.2 percent this year but the stock is trading at about 15 times earnings estimates for this fiscal year, a discount to the current clothing industry's average.

Moreover, its earnings are expected to grow 14 percent annually over the next five years, faster than the average industry rate, according to Thomson Financial.

Another thing that makes it a smart portfolio play is the fact that Nike is a hybrid between a manufacturer and a retailer. In addition to supplying its shoes to department stores and sportswear chains, Nike also operates its own branded stores called "Niketown" in the United States, Japan, China and India.

"They've done an excellent job of international expansion," said Goel. "So while gas prices and interest rates are rising in the U.S., India and China are experiencing a boom. More of Nike's revenue and profits are disproportionately moving to its global markets."

--Staples. The No. 1 office supply chain last week reported a strong first-quarter profit growth but disappointing sales because of weakness in sales of big-ticket items like office furniture.

Goel is still a fan.

"Gas prices could lead to a marginal decline in some office products but people will still need to buy things like staples and pens," he said.

And Citigroup analyst Bill Sims said in a recent note that Staples' growing emphasis on catering to small businesses is also helping to make it less vulnerable to the buying patterns of the everyday shopper.

Staples (Research) shares are up 6.2 percent so far in 2006.

The stock currently trades at 19 times earnings estimates for this fiscal year, at a premium to the industry's 18 percent average. And earnings are expected to grow 15 percent annually over the next five years, according to Thomson Financial, slightly faster than the industry average.

--Best Buy. The No. 1 seller of consumer electronics is in a sweet spot because of the strong demand for gadgets like MP3 players and digital TVs, said Andy Hargreaves, analyst with Pacific Crest Securities.

Best Buy (Research)'s shares have jumped about 20 percent year-to-date and the stock currently trades at 19.2 times earnings estimates for this fiscal year, at a premium to the industry average of 18 percent. Again, earnings are expected to grow 17 percent per year over the next five years, faster than the industry average, according to Thomson Financial.

The video game segment should also help spark a buying frenzy at its stores in the second-half of the year with the launch of the PlayStation 3 and more shipments of Microsoft's Xbox 360 game console.

Longer-term, Hargreaves said Best Buy is doing well to diversify its revenue stream by enhancing services like its 24-hour technical support task force called the "Geek Squad."

--Williams-Sonoma. Goel said the multi-branded retailer of kitchen, bath and bedroom products - it operates the Williams-Sonoma and Pottery Barn chains - is stealing customers from struggling peers such as Pier 1 Imports.

"It's successful because it offers plenty of choice to consumers," said Goel. "If people want to trade down from the higher-priced Pottery Barn, they can shop for something less pricey for the kitchen at Williams-Sonoma."

Williams-Sonoma's shares are down 7.8 percent year-to-date. The stock currently trades at 17 times earnings estimates for this fiscal year, at a slight discount to the industry average.

But earnings are expected to grow 20 percent annually over the next five years, much faster than the industry average, according to Thomson Financial.

--J.C. Penney. Similar to Williams-Sonoma, the department store operator's use of catalogs, a Web site and brick-and-mortar stores gives it significant leverage over its competitors.

In addition to capturing new customers through its different channels, observers say the retailer is also attracting shoppers with competitive prices, better merchandise and stronger exclusive in-store brands.

Penney's shares are up 11.2 percent year-to-date the stock currently trades at 14.2 times earnings estimates for this fiscal year, at a steep discount to the industry's 18 percent average. Earnings are expected to grow 15.4 percent annually over the next five years, faster than the industry average.

Said Goel, "Penney has turned itself around. It's built a strong customer loyalty and its direct sales through the Internet and catalog are actually three times the volume of Wal-Mart or Target's direct sales."

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Three retailers in trouble. Click here for more.

Wal-Mart's gas threat. Click here for more.

Rising gasoline = Trouble for retailers. Click here for more. Top of page

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-- Analysts quoted in this story do not personally own shares of the stocks and their firms do not have an investment banking relationships with the companies mentioned in the story.
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.