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Retailers in 2014: A Story of Execution

With the spending-centric December behind us, how will retailers fare in 2014? The question of resilience in consumer spending in a still spotty recovery is a question front-and-center for many investors, particularly as preliminary data trickles in. The truth is that retail is a game of haves and have-nots. Execution and merchandising are more important in the retail sector than in any other.

Today's preliminary results are case-in-point of this concept. We see this at the low end, when an outfit like Family Dollar (FDO), which reported a disappointing quarter this morning, gave an outlook for negative comps in 2014 and cut outlook by 15%. Management cited weakness in discretionary items due to a weakened consumer in particular - but that's not something we are seeing at Dollar General (DG), the behemoth of the group that continues to outperform and has more growth upside to boot. This divergence played out last year, with Family Dollar up 2% and Dollar General up 37% last year.

A stellar merchandiser and manager? Terry Lundgren, CEO of Macy's (M - Get Report). We continue to see a trend of transition to online buying, where Amazon (AMZN) is king. But traditional department store Macy's has been a first-mover innovator in embracing an omni-channel initiative to optimize both online and brick-and-mortar sales. This, coupled with in-store initiatives including "My Macy's" localization and salesperson training, termed "Magic Selling," have continued to drive the stock higher. The company's announcement this morning of November/December holiday same-store-sales of 3.6% and solid 2014 guidance and cost reductions all benefit the stock. Macy's is confronting reduced mall traffic head-on at Macy's and Bloomingdales - a key reason why it has outperformed peers including Nordstrom (JWN).

Online competitive worries hover over the latest results from Bed Bath and Beyond (BBBY - Get Report)where third quarter comps came in at 1.3%. And we saw just a couple of days ago weak traffic at the recent hyped IPO Container Store (TCS - Get Report). L Brands (LB), parent company for Victoria's Secret and Bath & Body Works, also revealed holiday scars today with disappointing numbers.

Must Read: SALT 2013: Productive Spending Priorities and Government Consensus

Key is having the right merchandising along monitoring traffic appropriatel. The oft-cited Michael Kors (KORS)-the hot new brand with the right pricing and right product- versus Coach (COH)-which has hit brand image issues-is a compelling example, with Kors up almost 60% and Coach up 1% in 2013.

Some key names that are doing things right? Athletic-apparel names, outdoor category, and lifestyle category stocks are well positioned in the current environment. Think of VF Corp (VFC), a name that has successfully acquired and transformed brands from North Face to Timberland; Under Armour (UA), a junior growth athletic apparel name; and of course behemoth Nike (NKE).

A play off of Macy's? PVH Corp (PVH), the king of ties and dress shirts that you know for Calvin Klein and Tommy Hilfiger. CEO Manny Chirico has continued to execute.

In the value space, look at Ascena (ASNA) - which has diversified across teen brands like Justice along with transforming Lane Bryant and Catherine's. And, the offprice channel-TJX (TJX)and Ross Stores (ROST) is also well positioned in this environment. Plus, Tanger Factory Outlet Centers (SKT)is the way to play the continued strength in outlets, even as Real Estate Investment Trusts (REITs) have underperformed of late.

The bottom line: In retail, merchandising and managing traffic is key. When it comes to stock picking, retail is the sector where this is most important.


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