NEW YORK, March 16 (Reuters) - Lower tax rates for U.S. retailers drove a rally in shares for the sector that has largely fizzled out, but investors see buying opportunities among retailers they believe can thrive despite the growing exodus of consumers to online shopping. Shares of brick-and-mortar retailers in the S&P Composite
1500 Retailing index surged 23 percent as a group
from November, when the Trump administration's tax overhaul began to pick up steam in Congress, to January, when the S&P 500 hit its peak. That was more than double the 9.5 percent gain for the S&P 500. But retail stocks lost ground in February as they reported quarterly results, even though fourth-quarter earnings for nearly 70 percent of retailers beat average analyst estimates, according to Thomson Reuters I/B/E/S. The group of store-dependent retailers within the S&P 1500 Retailing index has lost 3.8 percent so far in 2018, while the S&P 500 is up 2.8 percent year to date. U.S. retail sales have fallen for three straight months.
"Some issues are coming back into focus for traditional retail," said John Carey, portfolio manager at Amundi Pioneer Asset Management in Boston. Still, some investors see buying opportunities with retailers they believe can thrive even as more shoppers migrate
to Amazon.com Inc and other online retailers.
"As brick-and-mortar retail gets displaced more gradually over time, we're looking more to specialty retail," said Mona Mahajan, U.S. investment strategist at Allianz Global Investors in New York. Declines in retail stocks suggest investors had already priced in benefits from the tax overhaul, analysts said. Investors shunned companies that said they would reinvest tax savings rather than let them flow to earnings, said Simeon Siegel, an analyst at Nomura Instinet. For instance, shares of Victoria's Secret owner L Brands , which announced $100 million in wage and benefit increases for its workers, dropped 13.9 percent the day after it reported quarterly results. However, the S&P 1500 Department Stores index has risen 11.8 percent since the beginning of the year.
Last year, shares of department stores slumped 14.1 percent from 2016 levels, as investors viewed them as on the edge of obsolescence. But since then, they have streamlined their inventory and reduced their number of locations. "The stocks got overly cheap," said Bridget Weishaar, a senior equity analyst at Morningstar. "They were almost priced as if the sector was going to die. That's not going to happen."
Companies with strong brands such as Michael Kors Holdings
Ltd and PVH Corp , the parent company of Calvin
Klein and Tommy Hilfiger, are better positioned for upside, said Allianz's Mahajan. Oliver Pursche, vice chairman and chief market strategist at Bruderman Asset Management in New York, favors stores such as
Tiffany & Co , which he said will benefit from the
overall strength of U.S. stocks as upper-middle-income shoppers gain confidence in their financial standing. "They see their 401(k)s and other investments doing well, and they're apt to go out and spend extra," he said. "It's viewed as high-end, but there are a lot of reasonably priced goods at a Tiffany's. It's not like Van Cleef and Arpels, where you can't walk out without spending $15,000." Tim Ghriskey, chief investment strategist at Inverness Counsel in New York, believes consumer discretionaries have diminished pricing power in the wake of Amazon's ascent, yet he
said Walmart Inc may be an exception. The big-box
retailer has fallen 15.1 percent since it reported quarterly results on Feb. 20, mainly because inventory issues caused its online sales to fall. "The decline in the stock is driven by very short-term factors," Ghriskey said. "We think that Walmart can be a strong number two, a reasonable number two to Amazon in the general online world."
(Reporting by April Joyner; Editing by David Gregorio)