Publish date:

How to Play Retail Stocks in 2010

Here are ways to play the retail sector in 2010 to mitigate modest consumer spending.



) -- Retail sales may be slowly steadying, but there are still plenty of concerns heading into 2010.


(C) - Get Report

has forecast that consumer spending will increase by just 2% next year, which means retailers will once again be battling for shoppers' dollars.

Of course, not everyone will be successful, making it difficult to pick out the winners from the losers. But there are a few smart retail bets to mitigate lingering fears.

If you worry the U.S. economy won't rebound quickly:

While consumers' may still be spending cautiously in the U.S., economic recoveries have been more robust internationally, a trend that favors companies with a strong portfolio overseas. This includes retailers such as


(GES) - Get Report


Home Depot

(HD) - Get Report


Costco Wholesale

(COST) - Get Report

, and

Wal-Mart Stores

(WMT) - Get Report


"Guess still has growth and the stock is still cheap," says Needham analyst Christine Chen.

The specialty retailer is resuming square-footage growth in 2010 in both North America and other countries, Guess CEO Paul Marciano said last month when the company reported third-quarter earnings.

Guess has 373 stores in Europe and the Middle East, 327 in Asia and another 53 locations elsewhere overseas.

"Market penetration in new markets in Europe and Asia will be the main drivers of growth for Guess in 2010," Chen wrote in a note.

Acceleration of economic growth has been especially profound in China and Brazil, while Canada, Japan, Mexico and the U.K. are experiencing relatively strong recoveries, Citigroup analyst Deborah Weinswig wrote in a research note.

The weak U.S. dollar and stronger euro could also benefit top-line and earnings growth at retailers with international operations in the first three quarters of 2010, Needham's Chen added.

If you want to play an economic rebound in the U.S.:

Many retailers were hit hard in 2009, even those that were highly successful before the recession began. Some of these beaten down but still high-quality names will likely see a turnaround in 2010.

Keep an eye on

American Eagle Outfitters

(AEO) - Get Report


Pacific Sunwear of California




(TGT) - Get Report


For two years now, American Eagle's women's merchandise has been selling only so-so, but the holiday season marked the first sign of an improvement, Chen said.

The teen retailer has also significantly reduced its promotional activity, which should lead to margin recovery in the first half of 2010.

Pacific Sunwear's new management team may be just what the skate- and surf-inspired retailer needs to return to profitability, said Brian Sozzi, an analyst at Wall Street Strategies. In June, Pacific Sunwear hired Gary H. Schoenfeld, former head of

VF Corp.'s

(VFC) - Get Report

Vans, to replace CEO Sally Frame Kasaks.

Turnaround stories are also likely at

TheStreet Recommends

CVS Caremark

(CVS) - Get Report

, Home Depot,

J.C. Penney

(JCP) - Get Report



(M) - Get Report

, all of which should see strong earnings growth as the economy improves and company-specific initiatives gain traction, according to Citigroup's Weinswig.

Target's revival will be aided by the rollout of its P-Fresh format. The addition of food and consumables to its stores is driving traffic to other, more discretionary departments, Weinswig said, and positive traffic trends may turn into market share gains in 2010.

Consolidation within department stores should benefit J.C. Penney, allowing it to gain market share. The growth of private label and exclusive brands, such as

Liz Claiborne


and MNG by Mango, is another potential driver of earnings for J.C. Penney, Weinswig wrote.

If you doubt consumers overall will return to their old spending habits:

Sure, many Americans will remain on the hunt for bargains well into the new year.

But this could be a good time to place your bets on some of retail's luxury players. Many analysts believe that high-end consumers, at least, will go back to their former ways in 2010.

"These shoppers have both the ability and willingness to spend," UBS analyst Roxanne Meyer said. "Last year they still had the funds to spend, but

they turned off the willingness due to fear. Now there is a pent-up demand," she added.

Names like





(TIF) - Get Report





Urban Outfitters

(URBN) - Get Report

have already begun to show some positive signs.

Tiffany's direct link to the performance of the stock market and its high exposure to New York is an advantage for the jeweler.

"Our regression analysis indicates about 40% of the variance in Tiffany's U.S. comparable sales can be explained by moves in the S&P 500 six months prior, as we believe increasing stock market wealth drives net worth and greater consumer spending on luxury goods," Citigroup analyst Kimberly Greenberger explained in a note.

Sales in New York account for about 35% of Tiffany's total U.S. sales, and Greenberger foresees its sales in the region improving as the financial sector gains momentum and jobs and compensation recover.

Coach, J.Crew and Urban Outfitters all cater to customers with an average household income of about $100,000 or more; stock market gains could benefit these retailers as well.

"We expect a recovery at the high-end in 2010," Greenberger went on, "as high-income consumers benefit from the positive wealth effect created by rising equity markets, combined with relatively low unemployment among these consumers and improving confidence."


Reported by Jeanine Poggi in New York.


>>Five Retail Stocks to Watch in 2010

Follow on


and become a fan on


Copyright 2009 Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.