8 Top Retail Stocks: Holiday Sales Favorites

NEW YORK ( TheStreet) -- If back-to-school provides any insight into the upcoming holiday season, it is poised to be a very merry Christmas for some retailers.

Looking at the traditional back-to-school period, which stretches from July through September, TheStreet found several retailers came in at the top of the class. Given that back-to-school winners are usually indicative of holiday winners, this elite group of retailers is worth noting. "As many investors use fall as a gauge for holiday, we believe interest in the group could be on the rise," UBS analyst Roxanne Meyer, wrote in a note.

Department stores, from both the low-to-high end dominated the list, as the sector has experienced a steady rebound over the past six months. Teen retailers, which are generally a barometer of discretionary spending, also had a strong finish.

The final month of the back-to-school season should have served to ease the fears of those investors who predict a double-dip in consumer spending, says Brean Murray analyst Eric Beder. In September, retailers were up against some of the toughest comparisons of the year, and were still able to post significant gains, a positive sign of the momentum heading into holiday.

But back-to-school came later this year, with shoppers procrastinating until classes started before picking up fall items. Similarly, holiday spending might not kick-off with a big bang on Black Friday, with shoppers waiting until closer to Christmas to find the best deals, says Wall Street Strategies analyst Brian Sozzi.

Back-to-school was also driven by high levels of discounting, particularly in the teen space. Average unit retail was down in the double digits among most of the mall retailers in September, and was noticeably more promotional this year than last year, says Janney Capital Markets analyst Adrienne Tennent.

All of this is largely predicated on the fact that inventory levels are higher this year, as retailers bulked up on merchandise during the first-half of the year following a wave of consumer optimism. But that upbeat sentiment has come and gone, and inventory for the holiday season, which is generally purchased up to nine months in advance, will remain heavy. "Without creative, deep promotions, retailers won't come out on top this holiday," Sozzi predicts.

Ahead of the holiday season, it looks like October and November may be soft, as it is becoming evident that consumers will only shop when there is a catalyst. Wet Seal ( WTSLA), among other retailers, said while sales were robust in the beginning of September, during peak back-to-school, traffic dropped off once the shopping season ended.

So which retailers will retain this momentum? Read on to see which retailers are most likely to turn their back-to-school success into holiday sales....

Abercrombie & Fitch

Abercrombie & Fitch ( ANF) has been a standout of the back-to-school season, with average sales for the July-to-September period up 8.5%.

But these sales have been driven by price cuts, which have raised a red flag among analysts, who worry about the impact discounts will have on gross margins.

"While we believe the merchandise has improved, there is still work to be done as we believe a significant portion of the merchandise remains uninspiring and lackluster," Stifel Nicolaus analyst, Richard Jaffe, wrote in a note. "It appears the consumer agrees with us, as it is requiring deep markdowns to entice the consumer to buy the product."

Still, it seems several months of robust sales are starting to offset gross margin concerns among investors, as the stock soared more than 10% on Thursday following it's comparable sales report.

Limited Brands

Limited Brands ( LTD) was the dark horse of 2010, posting some of the biggest sales gains so far this year. For the back-to-school period, sales soared an average of 11.2%.

Much of this success is attributable to its Victoria's Secret chain, where two bra launches, NFL Pink merchandise and new fragrance, significantly buoyed sales.

Limited was one of the few retailers to up its outlook for the second-half of the year after it reported second-quarter earnings. "As long as both businesses continue to post solid comps on down inventory, with visible margin drivers in place, there isn't much of a bear case that we can make right now," J.P. Morgan analyst Brian Tunick, wrote in a note.

Limited will host an analyst day in New York City on Oct. 20.

Nordstrom

Nordstrom ( JWN), while not a typical back-to-school shopping destination, saw a 7.1% uptick during the period, according to TheStreet's calculation. September marked the 13th consecutive month traffic at Nordstrom increased.

"Although Nordstrom faces tougher comparisons in the second half, we believe that as management continues to focus the assortment to better reflect greater value, comparable sales will improve," Jaffe wrote in a note. "In addition, we believe the company's well-edited assortment, excellent customer service and ease of shopping through all channels, are differentiating factors helping the company to gain market share."

Ross Stores

Off-price retailers have been among the biggest winners amid the recession. And while Ross Stores ( ROST) and rival TJX ( TJX) has seen sales slow considerably over the past several months, the off-pricers remain some of the best bets heading into the holidays.

Ross Stores, in particular, reported a 3% gain during the July-to-September period, giving it a B in TheStreet's back-to-school tally.

The company also upped its third-quarter outlook, and is now expecting earnings between 94 cents and 96 cents a share, from a previous guidance of 79 cents to 83 cents.

"Compelling bargains and lean, quick-turning inventory drove solid comparable sales in September, as consumers responded favorably to the company's value-priced merchandise," Jaffe wrote in a note. "We believe Ross Stores continues to operate its business with considerably lower levels of inventory, which will likely drive margins in the third quarter."

Saks

Saks ( SKS), which took some of the biggest hits after the Lehman Brothers collapse, was up 4.6% for the full back-to-school season.

"The fact that luxury continued to post a strong performance is not surprising given the recent improvement in high-income household consumer confidence," Michael P. Niemira, chief economist and director of research at the International Council of Shopping Centers, said in a statement. "This is especially encouraging for the economy and the upcoming holiday-shopping season because the top 20% of households by income account for nearly 40% of total consumption."

Saks has been in the process of shuttering underperforming stores, which should also boost its profitability going forward. The company announced it will close another two locations by the end of the year, following an announcement in August that it will shutter two other stores.

Zumiez

Zumiez ( ZUMZ) was the biggest gainer of back-to-school, reporting an 11.7% surge in sales during the period.

The skate-inspired retailer upped its third-quarter outlook, and is now predicting earnings in the range of 28 cents to 30 cents a share, from a prior outlook of 25 cents to 27 cents.

"We believe the strategies the company put in place are beginning to pay off, especially the improvements made in regards to its juniors business," analyst Jennifer Black, of the firm bearing her name, wrote in a note.

Zumiez has improved its merchandise for girls and is seeing strength in its private-label business, which Black says is trend-right and price competitive.

Historically, the fourth quarter is Zumiez's biggest, with 80% of profits and 60% of sales coming around the holiday season.

Kohl's

Kohl's ( KSS) remains one of the few growth concepts left in the department-store space. The value-priced retailer reported a 3.8% climb in back-to-school sales over the past three months, even while up against some of the most difficult comparisons in September.

Footwear has been the strongest category, with a sales in the high-single digits in September.

Earlier in the week Goldman Sachs downgraded rivals J.C. Penney ( JCP) and Macy's ( M), saying there were few catalysts to propel the stocks. The brokerage firm named Kohl's as one of the only department stores that still has growth momentum.

Kohl's announced during the Goldman Sachs' retail conference in September that it is looking into launching a new private-label brand. The value-priced department store has seen remarkable success with its Vera Wang, Elle, Fila Sport and Food Network labels, and analysts believe another line of this caliber will just add to its momentum.

Kohl's also said earlier this week that it will increase its seasonal hires by more than 20% for the holiday to 40,000.

Macy's

Macy's ( M) saw its best back-to-school season in years, CEO Terry Lundgren said after the department store reported better-than-expected September comparable sales.

Overall, Macy's posted a 5.4% uptick for the July-to-September period, with much of these sales being driven by its new Madonna fashion line, Material Girl, and its private-label American Rag brand. The company also launched the Kenneth Cole Reaction exclusive men's sportswear brand, and is preparing for the exclusive launch of Sean Jean men's sportswear.

"We continue to be impressed by the ability of our My Macy's localization initiatives to address specific customer needs by location, including in those pilot markets where implementation now is in its third year," Lundgren said in a statement.

--Written by Jeanine Poggi in New York.

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