An October Christmas for retail stocks

Consumers are still watching their wallets, but compared to last year, retailers are in pretty good shape for the upcoming shopping boom.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Suzanne Kapner, writer

Hottest holiday toys -- kid tested
TimetoPlayMag.com picks Barbie Fashionistas, Crayola Crayon Town and LEGO Star Wars among the top toys of the year. Our experts, all under the age of 10, weigh in.
At what level will the Dow Jones industrial average end 2009?
  • Above 11,000
  • Between 10,000 and 11,000
  • At 10,000
  • Below 10,000

CDs & Money Market
MMA 0.69%
$10K MMA 0.42%
6 month CD 0.94%
1 yr CD 1.49%
5 yr CD 1.93%

Find personalized rates:
 

Rates provided by Bankrate.com.

NEW YORK (Fortune) -- Christmas has come early for retail stocks. The Standard & Poor's Retail Index is up 72% from its lows in March, compared with a 61% gain in the broader S&P 500 Index over the same period.

Some companies have even started to raise guidance. After reporting stronger-than-expected September sales, TJX Cos. (TJX, Fortune 500) said it now expects to earn more in the third and fourth quarters than previously anticipated.

Yet, no one is projecting a blowout holiday season. What's going on?

Despite the continued mood of frugality that has gripped the country and put a damper on consumer spending, retailers have a few things going for them. Namely:

Sales, while still anemic compared with the recent go-go years, have been stronger than expected. September same-store sales, or sales at locations open more than a year, grew a scant 1.1%, but that was better than the expectation for a 0.8% decline, according to Retail Metrics.

Although September results were buoyed by easy comparisons from a year ago, they marked their first monthly gain since August 2008, a sign that retailers may be starting to turn the corner.

Anecdotal evidence suggests that October will be another strong month. Moreover, the National Retail Federation predicts that holiday sales will fall only 1% to $437.6 billion -- far better than the 3.4% decline we saw last year.

The consumer is in better shape. To be sure, high unemployment and a decline in wages and house prices continue to weigh heavily on consumer spending.

But compared with a year ago, many consumers have a financial cushion. Credit card debt is down nearly 8% over the past year, and the savings rate has doubled, according to Economy.com.

Plus, there is pent up demand. After depriving themselves all year, shoppers are ready to treat themselves in small ways again.

Retailers have less inventory. Stores have spent the past year drastically reducing their stock cutting inventory in anticipation of lower sales. That means they are entering this holiday season in a much stronger position. Leaner inventories allow merchants sell more goods at full price -- which boosts profits.

"Retailers have a lot of things working for them going into this holiday season," says Stifel Nicolaus analyst Richard Jaffe. "And that optimism has been priced into a lot of the stocks."

Also helping to push the stocks higher: Retailers tend to benefit in the early stages of an economic recovery, which is one reason why investors have been piling into the group now, just as the economy appears to be pulling out of the recession.

"If you find an extra $20 in your pocket, you're not going to go out and buy a new car," Jaffe says. "But you might buy a pair of jeans or a new sweater."

For similar reasons the NPD Group expects traditional apparel items such as sweaters to be among the top gifts this holiday season, after losing ground in past years to electronic gadgets. In a recent report, NPD went so far as to call apparel a "bright spot."

That type of spending should help specialty retailers, but not all of them are created equally. Here are some of Jaffe's picks and pans:

Picks

The Children's Place (PLCE): Investors have overlooked the children's apparel retailer, which has $7.50 a share in cash and no debt, because of a public battle with its former CEO, who was ousted for violating ethics policies and then tried unsuccessfully to buy the company.

Gap (GPS, Fortune 500): After years of sluggish sales, the maker of denim and khakis is showing some life

Urban Outfitters (URBN): The maker of baby doll dresses, denim and appliquéd sweaters continues to connect with trendy twentysomethings through its namesake brand as well as Anthropology, a sister chain.

Pans

Talbots (TLB): The shares are up more than threefold since January, but the company continues to lose money.

J. Crew (JCG): Shares of the maker of preppy clothes with a twist have become too expensive, trading at 24 times 2010 earnings.

Lululemon Athletica (LULU): The company is retrenching after growing too fast. To top of page

Company Price Change % Change
Bank of America Corp... 28.91 0.46 1.62%
Advanced Micro Devic... 29.75 1.37 4.83%
General Electric Co 8.80 0.35 4.14%
Freeport-McMoRan Inc... 9.55 0.59 6.58%
Apple Inc 236.21 6.12 2.66%
Data as of Oct 11
Index Last Change % Change
Dow 26,816.59 319.92 1.21%
Nasdaq 8,057.04 106.26 1.34%
S&P 500 2,970.27 32.14 1.09%
Treasuries 1.75 0.09 5.67%
Data as of 7:51pm ET
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

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.