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Time to Go Shopping for Retail Stocks

Select strong earners for a winning holiday season


Things are getting bullish on the retail front.

On Tuesday, we received the official October figures from the Commerce Department that showed retail sales rose 0.5% during the month. The overall metric was spurred by healthy auto sales, but the growth numbers were actually more impressive sans auto and gasoline. That figure came in at a robust 0.7% increase, the biggest upward move since March. For investors with a penchant for retailers, the October sales figures mean it could be time to go shopping.

Of course, before you dive into the sector, there are several things to consider. First off, all retailers are not created equal. Yes, we have seen a very nice move higher in the retail sector at large, as represented by the SPDR S&P Retail ETF (NYSE:XRT). That fund, which includes stalwart retail names like Sears Holdings Corp. (NASDAQ:SHLD), Aeropostale (NYSE:ARO) and J.C. Penney Co. (NYSE:JCP), is up 19.6% since its Oct. 3 low. But going forward, investors might want to be a bit more discriminating with their purchases.

Ferreting out the retail winners from the wannabes isn’t the simplest task, but that task has become easier over the past week thanks to the latest earnings reports. Last week, value-focused department store operator Kohl’s Corp. (NYSE:KSS) reported a 20% gain in third-quarter earnings on rising revenues and strong same-store sales growth. Conversely, high-end department store operator Nordstrom (NYSE:JWN) missed its sales forecasts for the quarter. Although the retailer reported a rise in revenue of 14.2% over the year-ago quarter, it fell short of expectations.

Other notable retail firms reporting earnings of late were Macy’s (NYSE:M), which outpaced Wall Street forecasts on healthy sales and improved operating margins. The aforementioned retailer J.C. Penney delivered a loss for the third quarter, but that loss actually bested expectations. Unfortunately, revenue slid almost 5%, reflecting the discontinuation of its catalog and catalog outlet business. The company also offered up a disappointing fourth-quarter forecast that disappointed analysts.

The diverse mix of retail earnings will likely continue during the next few weeks. On Tuesday, we found out that the world’s biggest retailer, Wal-Mart (NYSE:WMT) reported a 2.9% decline in third-quarter profit, although it did see same-store sales rise for the first time in 10 quarters. Target (NYSE:TGT), which recently brought its partnership with American Express full-scale, released expectation-beating earnings Wednesday. The company announced earnings of $555 million, or 82 cents per share, beating FactSet analysts’ expectations of 74 cents per share. Revenue rose to $16.4 billion — the fourth-straight quarterly increase.

The bottom line here for investors is they might be best served by picking the strongest retailers showing the most earnings momentum, especially heading into what is expected to be a solid holiday shopping season.

A recent survey conducted by accounting firm BDO USA, of Chief Marketing Officers (CMOs) at U.S. retailers, showed that although cautious heading into the holiday season, retailers are optimistic about their prospects going forward. Chief marketing officers say they expect holiday sales to rise about 3% for the year.

The real interesting thing about the survey is that despite their caution, CMOs at major retailers overwhelmingly say they’re expecting increased sales this holiday season. Overall, 48% of those surveyed anticipate their holiday season sales will stay about the same, while 41% expect their sales to rise. Only 11% foresee a decline. Among CMOs from some of the biggest retailers, 67% say holiday sales at are expected to rise, while just 33% see their sales staying about the same. No CMOs from large retail chains expect their sales to fall.

If the CMOs are on target, then investors who hold positions in the strongest names in the sector may indeed have a very happy holiday season.

As of this writing, Jim Woods did not hold a position in any of the aforementioned stocks.

Article printed from InvestorPlace Media,

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