4 Retail Stocks to Buy Now — and 2 to Avoid

As retailing gets more brutal, the winners have to have an edge

   
4 Retail Stocks to Buy Now — and 2 to Avoid

Unseasonably mild weather and early Easter and Passover holidays gave most retailers a big bounce in March. But if they want to outpace the competition in the long run, they need to find an edge. And focusing on customers is the winning formula these days.

The 18 retailers tracked by Thomson Reuters posted average same-store sales gains of 6.9% in March — better than the expected 5.3%.

Still, few retailers are sanguine when it comes to these super-sized March sales numbers, and most believe April sales will be softer as a result of timing. That means top retailers can’t stop working hard in an increasingly competitive and commoditized market. To build on those positive sales numbers — and boost stock performance in the bargain — retailers must find new ways to engage customers and build brand loyalty.

Successful retailers are increasingly focused on customer-centric strategies, including investments in information technology, e-commerce, merchandising, mobile platforms and customer service, according to a recent study by the NRF Foundation and KPMG. The report, which surveyed 247 retail executives from different sectors, outlined their strategic priorities for this year.

“Though customers are always a company’s top priority, customer satisfaction will get a huge facelift this year,” said NRF President and CEO Matthew Shay. “From increasing their brand visibility through cross-channel initiatives to providing unique, personalized shopping experiences through every channel, retailers have indicated 2012 is all about the customer.”

So which retailers are poised to emerge from the crowded pack this year? Here are four retail stocks to buy now and two to leave on the shelf:

Buy:

Ross Stores (NASDAQ:ROST). This designer discount store posted a 10% gain in same-store sales last month — more than double the expected 4.6%. ROST’s big edge is in technology: It rolled out its planning and allocation system a couple of years ago, which has enabled the company to do a better job of getting the right merchandise to the right store at the right time. Store inventories are now nearly 40% lower than they were four years ago, meaning fewer markdowns, better margins and the ability to turn merchandise faster.

TJX (NYSE:TJX). TJX also posted a 10% gain in same-store sales for March versus expectations of a 5.3% rise. The retailer’s edge is its “treasure hunter” cachet. It has hundreds of buyers around the world who engage in “opportunistic buying” — acquiring designer apparel from real brands, not liquidators. Company executives boast that only about 15% of its inventory is past-season merchandise and is labeled as such.

Other tactics include “loss leaders” — like selling Apple’s (NASDAQ:AAPL) iPads for $100 off the company’s list price. The move raised the ire of Steve Jobs, who commented in 2010 that TJX was “not an authorized reseller” of the device. But the retailer was stupid like a fox: Tech journalists went wild over the news, and the iPads generated holiday store traffic.

Macy’s (NYSE:M). Macy’s sales, which had been expected to come in 4.8% higher, ended up at 7.3%. Macy’s edge centers on a robust, multichannel strategy that coordinates all of its efforts among bricks-and-mortar, Web commerce and mobile applications. It also focuses on “localization” — its “My Macy’s” initiatives target about 15% of the merchandise at each store specifically for that store’s customer demographic.

The company also has been analyzing customer behavior data and is beginning to create analytical behavioral models of its customers’ shopping patterns. Macy’s is beginning to use this data to test new marketing approaches as well.

Gap (NYSE:GPS). Gap is gaining ground, with March same-store growth of 7.3% compared to the expected 4.8%. The chain’s sales improvement is notable because of how far its fortunes had fallen and how much better the brand looks since CEO Glenn Murphy replaced its president and chief designer a little more than a year ago. The fashions are more fashionable, and colors are brighter and more appealing.

But the most significant changes are growth in its online business, the closure of 189 U.S. stores and reducing the square footage of its retail stores while increasing the size of outlets. Gap also is speeding up its production cycle, expanding globally and has made investments in a internal social media network to boost feedback between corporate and store personnel. Despite the fact that its fourth-quarter earnings dropped 40%, the company is finally on the right track.

Avoid:

JC Penney (NYSE:JCP). JCP, which has stopped sharing its comparable-store sales while it reorganizes, is reinventing management yet again. The venerable mid-market chain announced Wednesday that Chief Financial Officer Michael Dastugue would leave the company this Friday. The retailer’s CEO, former Apple executive Ron Johnson, profiled on InvestorPlace in January, is trying to transform every aspect of the struggling chain’s operations.

Wednesday’s management shakeup is only one part of the strategy that has brought several former Target (NYSE: TGT) and Apple executives on board in recent months. In Johnson’s quest to cut $900 million in costs by the end of 2013, the company recently announced plans to lay off 900 employees, a move that will cost it $30 million to $38 million in severance costs. This is not the time to go all in on JCP.

Costco (NASDAQ:COST). The warehouse giant had a same-store sales increase of 5% excluding gasoline, compared to the expected 5.7%. Not bad, but growing customer frustrations may be an early warning of trouble ahead. While most retailers are trying to become more customer-focused, COST seems to be out of step. A new Consumer Reports survey found that grocery customers in general gripe most about service issues like not enough open checkouts, congested aisles, inept bagging, etc. “Service is minimal at warehouse clubs such as Costco and lengthy lines are a trade-off for day-in, day-out deals,” the magazine said.

Costco’s two-year self-checkout experiment ended badly and in a bizarre way. When the system rejected a payment card transaction, it didn’t notify the customer, so he or she walked out with the merchandise. If the weight of an item was different than expected, the system would simply void the purchase. One store reported a $60,000 inventory loss in six months – exclusively due to the self-checkout system.

But Costco’s biggest challenge might be the fact that its stock is no bargain right now, as InvestorPlace’s Lawrence Meyers noted in this March story.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned stocks.


Article printed from InvestorPlace Media, http://investorplace.com/2012/04/4-retail-stocks-to-buy-now-and-2-to-avoid/.

©2014 InvestorPlace Media, LLC

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