Retail stocks have suffered from a bit of schizophrenia of late: A slowing economy has consumers spending less, giving ammunition to the bears; while the bulls cling to interest rate cuts as the perfect tonic to lift retail shares.
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made its first surprise move to slash rates by half a percentage point on Jan. 3 -- it did so again Jan. 31 -- the
S&P Retail Index
is down about 3%.
Yet many are bullish on the sector, citing historical data that shows retail stocks are some of the top performers in the wake of rate cuts. Consider this: According to an analysis by Sam Stovall, senior investment strategist at
Standard & Poor's
, retail stocks reap strong gains for at least six months after initial interest rate decreases. In looking at all rate cuts since 1971, Stovall concluded that the best-performing sector is consumer staples -- such as drug stores and food-chain stocks -- which have risen an average of 16.2% in the six months following a cut. The consumer cyclicals sector, which includes department stores, apparel companies, footwear and general merchandise stocks, is also a strong performer, having risen an average of 13.9%.
With most major retailers slated to report earnings in the coming week, it is not likely to be pretty. Earnings warnings have already racked the sector, with
the most notable examples. Still, many expect a consumer spending rebound by the second half of the year, the same time analysts say retailers will begin reporting strong gains in comparable store sales figures, which measure sales in shops open at least a year.
We thought it was important to seek the perspective of someone paid to decide which retail stocks to buy with investors' money. For this, we spoke with Himali Kothari, the retail analyst for the
John Hancock Small Cap Growth Fund
Wall Street is pretty much split down the middle on the recession question. Which camp do you fall in, and how does that inform your view of the retail sector?
I don't see a recession, but more cautionary spending, or perhaps a slowdown. I just got off a call with
. They missed numbers and they guided to lower
comparable store sales due to a slowing economy. I just think that in specific sectors in retail it is more cautious than this time last year.
Which retail sectors do you expect to perform well, even if the economy goes down the tubes?
Look at apparel retailers, they had a big run already early in the year just due to the Fed cutting interest rates, and a possible tax cut, etc. As far as the sectors that will do well, I like restaurants. They are more defensive. I think even though there is this stereotype that says, "Oh my God, there's a recession and people are not going to go out." I think today's economy is much different from five or 10 years ago. I think there's a lot of restaurant companies competing in different spaces. I think they can withstand the recession. Perhaps people won't get the DVD this year, but they will go out.
Most of the large retail companies begin reporting earnings next week. What are you looking for, and what are some possible surprises?
A lot of retailers have already cut their numbers down, they've had some announcements when they released December and January sales. So the retailers across the board should be meeting in line with Q4 estimates. But the question again is going forward. The question is whether or not all the inventories were absorbed in January and cleared up and ready for spring deliveries. My concern is that if companies reduce comps for the outlook of the balance of 2001 they will also decrease their store expansion. Meaning they won't increase their square footage as much. So instead of guiding to perhaps 15 to 20 stores, if they are decreasing their comp guidance I'd like them to say, OK, maybe we'll open 10 to 15 stores; not throwing too much square footage given the fact that their sales are going to be a little lower than expected.
Tommy has just been beaten up. Everyone knows it's a second half
of 2001 story. Even
, which we hold as well. It just seems these companies -- apparel manufacturers -- had such a bad environment last year that now it's time. On the cost side they've been very disciplined. OK, the first half doesn't look too good, everyone knows that. But second half should look pretty good ... Columbia is a different animal, because they really benefited from the cold weather in 2000. For this year, it's too early to say. When the company reports backlog orders at the end of April for the fall, we want to see a substantial increase. If that's the case, it looks good. But I think what will really propel the stock forward is when we head in after Labor Day, when it gets very cold. We know they are going to do very well, because retailers will reorder them and Columbia will sell them their clothes at full margins.
Among retailers, we also own
. We own Whole Foods.
We've seen a good deal of restructuring and even bankruptcies of late within the retail sector. Is this something you think we'll continue to see?
I think so. When things are good, everyone is happy and everyone is expanding. But when things are slowing down, people are looking at their businesses. And we've seen a lot of musical chairs among the heads of a lot these retail companies --
, AnnTaylor, Gap, etc. ... We've had such a euphoria of expansion since '95, and I think people like the Gap have gotten a little bit ahead of themselves. And now they are faced with these huge stores that are not as productive as they would like them to be.
If you could only buy one retail stock right now, what would it be and why? And one to avoid?
I like Gymboree, and I'll tell you why. I don't know if you've seen the stock price lately, but it's been pretty seesaw-y. They actually hired back their
general merchandising manager in late 1999. She was there from '92 to '95 then left. Now she just promoted to CEO, Lisa Harper. If you see the correlation of the stock price for when she was there it was amazing. It dipped from '95 to '98 when she left, then recovered back again at the end of '99 when she came aboard because she could lead the team into new designs for 2000 and 2001. Also, they are not expanding rapidly; they are being more disciplined.
One to avoid right now would probably be AnnTaylor. The stock is at $26. The company has some issues, simply said. Their president left, who was their head merchant. Once they get a recognized CEO and their merchandise starts to look better, maybe for next spring, I think their stock will return to 30 or 35 bucks. Even though valuations are pretty low, I think their merchandise looks pretty bad in spring. I mean, the orange is not too flattering; no one's really going to wear it.