Shopping for retail stocks

The outlook isn't getting better, but isn't getting worse. We talked to retail analyst Todd Slater about his forecast.

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By Suzanne Kapner, writer

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NEW YORK (Fortune) -- Retail sales were dismal last year and analysts are predicting another rough patch ahead - some spring merchandise is already hitting the sale rack.

But there are also a few stray lights at the end of what promises to be a long, dark tunnel. While spending has yet to rebound, it appears to be deteriorating less rapidly.

Fortune sat down with Todd Slater, managing director and senior analyst at Lazard Capital Markets. He covers retail, apparel and footwear so we asked him about consumer sentiment, Wal-Mart and which stocks are on his shopping list.

It's been a tough winter for retailers. With the arrival of spring, is there any hope that consumers will come out of hibernation?

Things aren't necessarily getting better yet, but they are less bad. In February, for instance, almost half of the retailers reporting monthly sales at stores open at least a year exceeded analyst estimates. That shows that negative sentiment may be bottoming. Another tiny silver lining is that unemployment claims appear to be slowing.

Why is Wal-Mart doing so much better than its competitors? A lot of companies offer low prices, but it seems Wal-Mart is way out in front?

Wal-Mart (WMT, Fortune 500) is the best operator in the world. Nobody can deliver products from the supplier to the store faster or for less than Wal-Mart can. Falling gas prices are also a big gift to Wal-Mart shoppers.

And there is a reverse snobbery that is benefiting Wal-Mart right now. Wealthier consumers are boasting about getting bargains at Wal-Mart. On the apparel side, Wal-Mart has shifted its game by adding better-known brands such as L.e.i., Danskin and Ocean Pacific. Apparel has been the missing link to higher profitability for Wal-Mart.

Target has low prices too. Why isn't it doing as well?

Apparel and home goods make up about 30% to 40% of Target's sales, roughly double the percentage at Wal-Mart. Those categories have been among the weaker performers, which has hurt Target disproportionately.

Also, Target spent the last five years adding millions of customers to its credit card business. Some consumers just can't shop on credit right now and that's an incalculable disadvantage for Target.

When consumer spending does pick up, which categories will benefit most?

The areas that are the weakest now will come back the strongest. The jewelry business has really been struggling. People are not buying jewelry right now and jewelry retailers are going out of business.

When people start to feel better about the world, jewelry sales will take off because of pent up demand. Also, anything dressy will do well when the economy recovers. People will want to celebrate and they'll be tired of dressing like they're in a recession.

Will luxury spending go back to peak levels anytime soon?

The luxury customer won't be spending the way they were anytime soon. The government will tax them back to the stone ages and their assets [homes and stock portfolios] are worth a lot less than they once were.

Sales at Saks (SKS) are way down. How worried are you about the company's survival?

I wouldn't count them out. They are reducing inventory and they have less debt than some other luxury retailers. There's also plan B: They own about 70% of their square footage, including the New York flagship. They could do a sale lease back of their real estate and create some liquidity.

What retailers are you recommending investors buy right now?

I like True Religion (TRLG) and Deckers (DECK). They both have lots of cash, no debt and differentiated products. Also, both do just 15% of their business internationally - so that's a big growth opportunity for them.

Should consumers expect huge discounts this spring?

Consumers are can expect to pay less than sticker price on everything from cars to apparel. But I don't think you'll see the panic discounting we saw in the fourth quarter. Retailers have reduced inventory, so supply is more in line with demand. To top of page

Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
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