Pro Trader: Retail Rally Can't Be Stopped
The retail sector was on the rise Thursday morning after several large chains reported March same-store sales that soundly beat analysts forecasts. But will rising oil prices kill the rally?
That was the question concerning some traders as oil futures for May delivery passed $109.37 per barrel on fears that Libya’s civil war and Nigeria’s elections will further cut production. In a note to clients downgrading the retail sector, Deutsche Bank analyst Mike Baker said that higher oil prices lead to costlier gasoline, which will severely cramp consumer spending. He predicted a $67 billion decline in U.S. household spending if gas prices remain near $3.47 per gallon for the remainder of the year.
Stuart Frankel's Steve Grasso, however, doesn't think oil can destroy the retail rally.
“The easy bet has been to short the retail space because of oil creeping up and constantly making a new recent high every day,” Grasso said. “But that has proved to be the worst bet you could have made.”
Grasso, who personally owns retail stocks through a hedge fund that he invests in, has been on the winning side of the retail trade. He made a prescient call in March that same-store sales numbers would surprise to the upside and is bullish on April and May sales because of a later Easter and easy comparisons from last May.
“It’s an easy comp for a lot of these retailers because you have that later date on Easter,” Grasso said during the "Fast Money Halftime Report" on March 31. “So you can get that ramp up.”
Grasso was proven right today as the S&P Retail exchange-traded fund hit a fresh 52-week high thanks to strong sales and earnings performance from Abercrombie & Fitch and Limited Brands’ Victoria Secret, two of the funds' larger holdings.
Abercrombie & Fitch hit a fresh 52-week high on Thursday. Earlier in the week, the teen retailer told investors it expects $4.75 earnings per share for the fiscal year, beating expectations. Limited Brands posted a 14 percent rise in same-store sales, blowing away expectations of a 1.5 percent increase. Same-store retail sales at the 25 chain stores tracked by Thomson Reuters reported a 1.7 percent increase, compared to the 0.7 percent decline analysts had expected.
Grasso predicted that May sales could also surprise to the upside due to weakness last year from the May 6 'flash crash.'
Despite his bullish call, Grasso cautioned that investors should “do their homework” and pick individual names that provide real value for consumers and are exposed to strong markets. One cautionary retail name, GAP warned that earnings per share would fall 4 cents this quarter, missing estimates, due to the ongoing disaster in Japan.
After talking to portfolio managers in the retail space, Grasso was looking at Kohl’s as an investment pick. The store, he said, has managed its inventories well and provides a solid value proposition for fashion-conscious consumers watching their dollars. Kohl's was up nearly 1 percent by mid-day.
March 2011 Same-Store Sales
|Retailers||March 2011 Estimates||March 2011 Actuals|
|Kohl's Department Store||(7.9%)||(6.5%)|
|Saks Department Store||0.8%||11.1%|
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CNBC.com with wires.