As kids start getting antsy for Santa’s arrival, retailers are probably feeling the same pre-holiday excitement … and investors should, too.
The holiday shopping season always is a bright spot for the myriad stores selling big-ticket gifts and stocking-stuffers, but this year it looks set to shine even more.
To start, the timeframe for holiday shopping — between Black Friday and Christmas — is the longest it could possibly be: a whopping 32 days. That means eager shoppers have two extra weekends to knock out their holiday shopping list and, more importantly, spend their hard-earned cash.
Unsurprisingly, sales are indeed expected to climb. ShopperTrak recently released the first forecast for the upcoming season, and the positive outlook has given all the recent rah-rah about retail even more reason to continue.
In November and December, sales are expected to climb around 3.3%, and foot traffic — which means more browsing and theoretically more spur-of-the-moment purchases — also is expected to see a 2.8% jump.
If it plays out, that would continue what has been a solid streak for retail. According to Fox Business, sales have grown 34 out of the last 35 months — a success recently evidenced by the second quarter’s strong string of reports.
The Stock Effect
For investors, this could be the perfect time to jump into what looks to be a broadly improving sector. Diverse chains like Target (NYSE:TGT) and Macy’s (NYSE:M) for example, have each seen steady improvement over the past month, not to mention 20% gains since January.
Of course, a boffo holiday season isn’t all jolly. The downside to such a long shopping stretch? Extra hours can also mean higher operating costs.
But if that’s a concern, specialty retail stores look especially appealing. Names like Francesca’s (NASDAQ:FRAN) and Michael Kors (NYSE:KORS) each boast operating margins that are over 20%, and have each seen monster gains this year — 75% and 94% respectively.
Other stores, like Urban Outfitters (NASDAQ:URBN) and Gap (NYSE:GPS), on the other hand, have operating margins that are around half that, while big-box do-it-all retailers Wal-Mart and Target lag behind even further.
Still, it’s hard to believe that discounters like WMT and TGT will be harmed more than helped by said extra days.
Target, for one, should get a boost from its plan to cut back on holiday discounting — a move that will help bulk up the company’s margins. And other retailers — about 50% of those who responded to a survey by Hay Group — said they were looking to cut back on discounting overall this holiday season.
Wal-Mart, along with retailers like Toys “R” Us — owned by Vornado Realty Trust (NYSE:VNO) — Best Buy (NYSE:BBY) and Sears Holdings‘ (NASDAQ:SHLD) Kmart, also are trying to get a leg up by promoting layaway and, in some cases, eliminating associated fees.
Plus, despite the fine print tacked onto the increased sales period, the bottom line seems pretty clear: Consumers have been gradually pulling the plug on their piggy banks and starting to spend more again. The holidays should only give retail’s roll another push.
However, with so many variables at play, investors might be better off not sorting through a pile of stores. Instead, optimistic investors can get quick and easy exposure to the broader trend through exchange-traded funds.
Exchange-Traded Options
The SPDR S&P Retail ETF (NYSE:XRT), with oversees almost $800 million in assets, is one of the most popular and simplest bets you can make in retail. XRT holds more than 90 stocks covering a wide variety of retail names, with Ann Taylor (NYSE:ANN), Gap, Urban Outfitters, Chico’s (NYSE:CHS) and Children’s Place (NASDAQ:PLCE) among its top holdings. The fund has already gained around 23% since January, and has enjoyed strong Q4 performance in the past couple years. XRT also charges just a scant 0.35% in expenses.
Still, if you want to shop around a little, you’ve got other options.
The Market Vectors Retail ETF (NYSE:RTH), for example, emphasizes discount stores and online retailers — two subsectors that have been booming lately. Top 10 holdings include Wal-Mart, Amazon (NASDAQ:AMZN), Costco (NASDAQ:COST), Target and TJ Maxx (NYSE:TJX) — names that have carried the fund to 23% year-to-date returns. And just like XRT, the Market Vectors fund charges just 0.35% in expenses … though it’s certainly the road less traveled, with just $21 million under management.
The PowerShares Dynamic Retail ETF (NYSE:PMR) is lagging the other two ETFs — but with market-beating 17% gains, just confirming what we’ve been saying all along: retail is back. The fund is a little less defensive in nature than RTH. Again, you get exposure to Wal-Mart and TJ Maxx, with some heavy weight in healthy-food names like Whole Foods Market (NASDAQ:WFM) and The Fresh Market (NASDAQ:TFM), as well as discounters like Ross Stores (NASDAQ:ROST) and Dollar Tree (NASDAQ:DLTR) — a great stop for all those last-minute stocking stuffers. PMR has about $60 million in assets; it’s also the most expensive of these options at 0.63% in fees.
Bottom Line
If you’d rather pick a single retail stock, have at it. But if you can’t decide exactly what you want from Santa this holiday season, a retail ETF seems like the perfect gift bundle.
As of this writing, Alyssa Oursler did not own a position in any of the aforementioned securities.
