Specialty retailers continue to walk the high wire.
The group, which many fear is about to be clobbered by higher interest rates and tough comparisons in the year's second half, continues to march higher. The S&P Retail Index is trading just shy of its all-time zenith of 413.29, reached June 8. Many individual names are at or near two-year highs.
The catalyst has been a strong first quarter, in which sector profit rose 22.5% over last year, according to Thomson First Call. Second-quarter earnings are seen continuing the trend, forecast to be up 19.8% from the prior year.
Going into the back half of the year, however, sales and earnings comparisons get much harder and earnings momentum will probably decelerate. Aggregate third-quarter retail earnings are expected to increase 16.1%, while the fourth quarter's increase is currently pegged at 14.7%, said Thomson First Call.
"An argument could be made for them being at the peak," said Rob Wilson, an analyst at Tiburon Research who covers specialty retail stocks. "I would be worried because of the basic fact that it has been a nice run for this group, and I don't know if people have really factored in how difficult the sales comparisons are
in the second half of the year."
But others say select names in the specialty group could see more upside. They argue that fashion-oriented clothes stores are immune to higher rates and are starting to show pricing power as jobs become more plentiful.
"Retailers are currently indicating that inventories are satisfactory, making it less likely they will need to incur costly markdowns to clear overstocking," according to last week's Johnson Redbook Retail Sales report.
"Fashion really drives the business at apparel clothing retailers," said Howard Tubin, an analyst at Cathay Financial. "If the
raises rates, it won't affect the consumer's desire to shop for fashion."
The key to finding stock winners in the space might be to locate names with the least to live up to in the second half.
One company poised to take market share between now and December is
Abercrombie & Fitch
. The company is coming out of roughly four years of negative same-store sales and recently posted a 1% increase in May same-store sales. That followed April's flat results, March's 1% decline, February's 1% increase and January's 2% increase.
positive comps you have to be taking someone else's business," said Wilson. "This is a zero sum game now. ... If someone wins, then someone
else has got to lose." Sales have bottomed out at Abercrombie over the last several years, and now there's big room for EPS upside, said Wilson.
"I like Abercrombie because I think they're on the verge of turning around," said Tubin. "Retailers who go from negative to positive
same-store sales ... despite what interest rates do, the shares can still go up."
Investor appreciation of Abercrombie's future is intact as well. At around $37, the shares are just off their two-year closing high of $37.38, hit June 8.
also has somewhat easier second-half sales comparisons than many other retailers, Tubin said. The company had negative 10.5% comps in July 2003, which were followed by negative 10.4% results in August 2003 and negative 2.8% comps in September 2003.
Shares of American Eagle are hovering around $29, slightly off their two-year closing high of $29.52, hit June 7.
Two other strong specialty apparel stocks are
. Aeropostale shares are trading around $28, slightly off their all-time closing high of $28.95, hit June 7. And Talbots shares are trading for around $37.30, slightly below their two-year high of $38.80, hit June 7.