The National Retail Federation released a glowing forecast on Tuesday predicting strong growth in holiday retail sales.
Anyone investing in retail stocks is probably breathing a sigh of relief.
Retail has been notably weak this year. The SPDR S&P Retail ETF (XRT) lags the benchmark S&P 500 Index by 9 percentage points in 2014. Shares of retail titans like Walmart (WMT), Target (TGT) and even online powerhouse Amazon.com (AMZN) have all lost ground this year. And specialty retailers like Container Store Group (TCS) and Tile Shop (TTS) also are down big-time.
The sector started with a stumble in 2014, as a colder-than-average winter season coincided with a U.S. economy that refused to make much meaningful improvement. The housing market also took a severe hit, and the Federal Reserve took to blaming Mother Nature for the shoddy state of the economy.
To give you some context about just how bad things were looking, consider this: Initial reports had first-quarter U.S. gross domestic product falling by 0.1% this year, and the Department of Commerce later revised first-quarter GDP down to -2.1%. The last two times GDP turned negative were in 2001 and 2008 — as the country entered major recessions.
Economic weakness has crept into the results of TGT and WMT, which have struggled to grow same-store sales consistently this year, as well as AMZN, which continues to struggle with consistently low margins.
And with home prices slowing in August and interest rates likely to rise next year, derivative plays on the housing market like HD, Lowe’s (LOW) and TTS may suffer.
But the National Retail Federation thinks retail will be just fine this holiday season, and for a compelling reason.
Holiday Hiring Signals High Expectations
The NRF expects retail sales to increase 4.1% from last year in November and December, and the federation expects retailers to add between 725,000 and 800,000 seasonal jobs. Last year saw retailers add 768,000 seasonal jobs as holiday spending increased 3.1%.
Online sales, unsurprisingly, are projected to continue growing faster than brick-and-mortar sales; the NRF expects online sales growth to come in between 8% and 11% this holiday season.
AMZN would seem to be the obvious winner here, though if its rock-bottom pricing strategy continues to leave its bottom line lacking, fed-up shareholders could continue heading for the exits. Moreover, if Amazon has to pay back-taxes in Europe for shady tax avoidance practices, AMZN shares could be further punished.
However, Wall Street knows exactly what it’s getting with WMT and TGT — both companies are soundly, consistently profitable, and there isn’t the same kind of demand to see significant margin expansion. Meanwhile, they should be among the biggest beneficiaries of increased retail spending — yes, the U.S. recovery is coming along, but it isn’t exactly roaring. Americans are still strapped for cash, which means they’re still likely to try to stretch their buck at a Walmart or Target.
So if you believe the NRF’s forecast and think holiday spending will accelerate this year, your best bet might be the more traditional big-box retailers.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid.
