Retail Shares Already Reflect Strong 2004
The fundamentals are aligned for retail chains to enjoy solid results in 2004. But a rebounding economy, falling unemployment and easy first-half comparisons might not mean a lot for retail shares. The stocks of many chain-store companies posted double- or even triple-digit percentage gains last year, meaning they may not have much near-term upside left.
"I don't see retail
stocks being outperformers," said Susan Fulton, president of Fulton Breakefield Broenniman, a Bethesda, Md.-based investment advisory firm. "I personally don't think there's a lot of room for them to grow much more this year."
Bottom line: Investors will have to go back to picking individual stocks instead of placing a bet on the entire sector. For example, the S&P Retail Index is essentially flat since hitting a 52-week high in early November, while shares of
Gap
(GPS) - Get Report
are up 6% in the same period.
Investors face quite a different scenario vs. a year ago, when retailers suffered from swollen inventories after the soft 2002 holiday season, economic uncertainty, anxiety over a prospective war in Iraq and continued job losses. That made for a poor first half of 2003, as companies posted disappointing sales and earnings.
But retail stocks started to rebound last spring, and their financial performance followed suit in the second half of 2003. Although the holiday season wasn't as strong as some analysts predicted, sales were still far better for many retailers than in 2002.
With the bulk of chain stores set to report fourth-quarter earnings over the next three weeks, investors will find out how much of those sales flowed to the bottom line.
Clearly, retail analysts expect this year to be much better than last.
"What our analysis shows is broad growth," said Craig Johnson, president of retail consulting firm Customer Growth Partners.
On average, chain stores posted same-store sales growth of about 3.2% last year, said Michael Niemira, chief economist and director of research at the International Council of Shopping Centers. Same-store sales growth should rise to more than 4% this year, he said. That would mark the fastest rate of growth since 1999.
"Over all, I think this will be an upbeat year," Niemira said. Retailers are "still getting a lot of the benefit of cost compression, and they should get the benefit of stronger sales on the heels of a stronger economy."
Still, retailers' performance will vary greatly within industry subsectors.
"More and more within any category, there will be winners and losers," said Richard Feinberg, a professor of retail management at Purdue University. Instead of hoping that a rising tide will lift all boats, "it's more and more important that retailers learn to run their business by controlling costs and expenses."
Controlling costs could be particularly important if retailers other than department stores continue to need promotions to drive sales. While January sales were strong, analysts noted that deep discounting used to clear holiday merchandise boosted those numbers.
Retailers "had terrific prices. That is what moved goods," said Kurt Barnard, president of consulting company Retail Forecasting.
Expense controls could also prove crucial if 2004 doesn't turn out to be as strong as most analysts think. Another major terrorist incident or a sudden reversal in the war in Iraq could shake consumer confidence and derail the economy, noted Feinberg.
While the unemployment rate has fallen, new job creation has lagged, as evinced by the January jobs data. The shaky job situation could well weigh on consumer spending this year, as in the past several years, said Barnard.
"A lot of businesses are very, very wary of anticipating consumer demand," he said. "My outlook is
that I see people spending very cautiously, very carefully, very calculatingly. That's likely to last certainly for much of this year."
That could be bad news for the sector following the S&P Retail Index's 42% rise last year. Fast-growing apparel chains, such as
Pacific Sunwear
(PSUN)
, posted even stronger gains, rising 79%, while
Coach
(COH)
shares jumped 129%.
With high expectations already built into many retailers' shares, companies will have a difficult time boosting their stocks -- even with stellar earnings results, analysts say.
Picking and Choosing
In the second half of last year, and over the holidays, retailers that cater to affluent customers or discerning tastes tended to outperform. In particular, chains such as Coach,
Tiffany
(TIF) - Get Report
and
Nordstrom's
(JWN) - Get Report
saw sales surge.
Luxury-goods vendors should continue to perform well this year. But discounters such as
Wal-Mart
(WMT) - Get Report
and
Target
(TGT) - Get Report
should also continue to gain share, analysts say.
Other retailers that could do well are those that sell electronics, appliances, and home-improvement and furnishing products. Vendors of those products have seen their share of consumers' budgets rising steadily over the last 20 years, noted Johnson. That trend will likely continue, and could well show up in retailers' results this year, he said.
By contrast, consumer spending on apparel and other "instant gratification" purchases, such as books and sporting goods, as a portion of consumers' overall purchases have been declining over the last 10 to 20 years.
"People want lasting value. They want to improve the value of their home and possessions," Johnson said. "There are companies out there that are really capitalizing on these kinds of trends."
Besides this overarching trend, apparel retailers may face an even more immediate problem this year, said Britt Beemer, chairman of America's Research Group. Few seem to have come up with any must-have fashions that would drive sales, he said.
"To me,
the apparel chains are the big question mark," he said.
Despite such concerns, Fulton likes
Dick's Sporting Goods
(DKS) - Get Report
,
Chico's
(CHS) - Get Report
and Tiffany's. Fulton Breakefield Broenniman is long all three.
Investors with a contrarian streak might wish to consider
Kohl's
(KSS) - Get Report
, said one buy-side analyst who covers the retail sector.
Although Kohl's stock declined 20% last year, amidst disappointing sales results, "they're still a compelling format," said the analyst, who requested anonymity. "You don't have to have them be the comp-store sales king of the past for them to be successful." The analyst's firm is long Kohl's.