A dip in the price of oil has some investors taking a second look at the big discount retailers.
Just a month ago,
looked like a poor bet for the coming holiday season. Analysts were predicting that high oil prices would tamp down economic growth, depressing sales across the sector but focusing the pain on customers of the biggest chains.
But since oil took a dive -- it has dropped more than 10% in the last two-plus weeks, slipping below $50 -- Wal-Mart in particular has perked up, gaining 8%. Jobs growth accelerated last month as well. That has retail watchers feeling better about the next couple months.
"I think maybe we have seen the highs in gasoline pricing," said Ulysses Yannas, an analyst with Buckman Buckman & Reid. "If that is the case, I think you will continue to see these gains."
Yannas has been expecting Wal-Mart, the Bentonville, Ark., retail behemoth, to post year-over-year same-store sales gains in the 3.5% range over the holidays. Hit those numbers and keep oil prices in check, and investors could see the stock keep on moving.
"There have been two markets lately in retail," Yannas said. "One for the high-end, luxury sellers like
, and one for the discount stores whose customers feel the pinch from high gas prices. I suspect that you'll start seeing better performance from the lower end going into Christmas, and maybe more restraint from the higher end."
The second half of that view was certainly borne out in Thursday's Tiffany selloff. Shares of the jewelry giant fell 5.7% after the company turned in soft third-quarter earnings and cut its full-year earnings guidance.
All the same, most signs for retail seem to be coming up green in recent weeks. Last Friday's employment report said the U.S. economy added 337,000 jobs in October, marking its biggest gain since March.
"People are finding jobs now," said Richard Hastings, a retail analyst with Bernard Sands. "It's too early to call this a real rebound after only one month with good numbers, but it is clear that people are finding work."
On Friday, investors will get yet another number that could keep the party rolling: the government's retail sales figures for October. Same-store sales reports from individual retailers painted a mixed picture for the month, along with the numbers released from Detroit's auto manufacturers. But the Census Department's reading on overall sales could provide the lift needed for a nice rally in consumer cyclicals into the new year.
Economists on Wall Street expect sales to add 0.1% in October, down from September's 1.5% gain. Excluding auto sales, consensus estimates call for a 0.6% rise, matching the pace set in September.
Meanwhile, retailers are expected to show stronger earnings growth than the larger market. Companies in the Dow Jones Index of Retailers are expected to show earnings growth of 22% for the quarter, up from 21% in the second quarter, according to Thomson First Call estimates. Earnings growth at
companies, meanwhile, is expected to slide to 15% from 25% in the second quarter.
For its part, Wal-Mart is due to report third-quarter earnings on Nov. 16. Target was flat Thursday after posting a stronger third-quarter profit. Even so, the stock has added 25% since early August.
"These stocks are typically not big momentum plays," Hastings said. "Then again, these guys are growing at a steady clip with a lot of magnitude, and the worries about the health of consumers are not as substantial as they were just three months ago."