Retail is for Stockpickers

Retail is for Stockpickers

Since September 2004, the S&P Retail Index has been caught in a sideways consolidation channel at between 400 and 500, unable to establish a sustainable trend in one direction or the other. During that time, the monthly retail numbers have been largely mixed. But in January, the retail data (excluding auto) was impressive, showing growth of 2.20% versus the estimate of 0.8%. It was the strongest reading in years.

Yet the initial optimism appears to be fading after seeing mixed reports from the nation’s retailers on Thursday. The early data suggests that same-store sales growth will be sub par compared to what we saw in January.

The reading in January may have been an aberration because of warmer than expected temperatures. The surfacing of cold weather in February apparently sent a chill through the pocketbooks of consumers. Also, the strong January sales may have taken away from spending in February.

The reality is the absence of a positive trend in retail makes investing in retail stocks more of a risk. You need to pick the right company. Even bellwether stocks such as Wal-Mart Stores (WMT) are struggling as far as its share price in spite of some decent sales results and same-store sales growth. But the current valuation deserves a look.

Youth oriented clothes retailer Gap (GPS) is a company that is clearly struggling at the cash register. Its February same-store sales crashed 11% year-over-year, well above the Street estimate calling for a decline of 6.80%. This followed on the heels of an 11% decline in the company’s Q4 earnings along with a FY07 forecast that was short of Wall Street expectations.

GAP expects comparable-store sales to be negative in the first half and turn moderately positive for the remainder of the year. Same-store sales are widely viewed as the best indicator of a retailer’s health.

For investors, GAP is clearly a turnaround play that could pay off if it can somehow figure out how to attract shoppers. The fact is the company has great brand awareness and this counts for something in this brand conscious world we live in.

On the upside, you have a company like Best Buy (BBY), a dominant market leader in consumer electronics. The stock is just below its 52-week high, up 69% from its yearly low.

The reality is retail spending may be impacted by the higher financing costs associated with the rising debt loads across America. The personal savings rate is declining and was negative in January. Consumers are eating into their savings and you know this cannot be good for retail.

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