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News Editor
Whether the consumer comes back or not, it looks like retail stocks are continuing their upward charge.
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Steven Senne / AP |
The latest batch of monthly retail sales reports drives home the point that consumers are still conserving their cash, but despite weak spending levels, smart retailers are poised for better performance, and investors are taking notice.
Macy's [M
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], for example, posted a steep decline in monthly sales, but it increased its earnings forecast by nearly three-times more than analysts were estimating. Shares of Macy's surged on the news.
"The EPS upside at Macy's was very, very impresive," said Charles Grom, a broadline retail analyst at JP Morgan. "We think the same will happen at Nordstrom [JWN
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]. Kohl's [KSS
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] raised today. JCPenney [JCP
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] raised today. Bottom line, the street numbers have to move significantly higher still, and that's what's moving the stocks today."
The key is retailers were impacted early by the economic downturn and they have been working hard to manage their business.
"The retailers really saw this before everyone," says Scott Billeadeau, of Fifth Third Assets Management. "If you rewind back a year... many of these companies and the management teams have been in cost cutting and cost management (mode), and (have been) redefining the business models for a quite a while now, and I think that is one of the encouraging things because now when we do get some incremental top-line sales, I think there's going to be some dramatic earnings leverage in some of these companies."
Also, advances in technology have retailers keeping tight controls on inventory, allowing retailers to be more profitable even with small sales gains.
Still, investors may want to consider that consumers are still leary about straying from the basics, and there is a lot of fear that government programs such as "Cash for Clunkers" will siphon off consumer dollars toward vehicle purchases and leave little left over for retailers.
"As retail sales show today, the consumer remains the weak link," says Robert Morgan, a market strategies at Clermont Wealth Strategies. Despite this, he thinks investors can't ignore the retail sector.
According to Kimberly Greenberger, a retail analyst at Citi, said there is some traction away from the value-retail stocks.
"We are starting to see some traction away from value, and we think that's being driven by much better product execution and retailers that can stand out on the fashion," Greenberger said.
Still, she warns that more discretionary purchases remain under pressure.
"Consumers are spending for the 'needs,' but they are not spending for the 'wants' yet," Greenberger.
This will mean trouble for sustained revenue growth.
Craig Johnson, president of Customer Growth Partners, said he thinks that consumers will continue to focus on value until the job market recovers.
"The stock market clearly believes the consumer is on the way back,” Johnson said, “but like second marriages—and bear trap rallies—this may represent the triumph of hope over experience. Certainly, astute retailers can restore profitability by resizing their business to reflect lower demand levels, but rebuilding topline growth in this economy remains a major challenge.”
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