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Retail Stocks Tumble — Time to Buy, or Bail?

Walmart, Macy’s, Target and other retail stocks have given up serious ground in August

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Macy’s chief financial officer Karen Hoguet said during the company’s most recent conference call, “We believe that much of our weakness is due to the health of the consumer and to the fact that consumers seem to be choosing to make purchases in non-department store categories such as cars, housing and home improvement.”

As it turns out, she was 100% right. As evidence to that end, Home Depot (HD) and Lowe’s (LOW) both knocked it out of the park in the second quarter. Home Depot’s earnings grew 17% last quarter. Lowe’s pumped up its bottom line by 26%, and upped its full-year profit forecast from $2.05 to $2.10 per share, with revenue growth of 5% versus prior expectations of 4%.

Now What?

While the recent selling of most retail stocks might have been unnecessarily exaggerated, the broad concerns are merited. After all, many of the major retail names dialed back their current quarter and full-year estimates — a measure most of them would avoid taking if at all possible. There are pockets of strength, however, even if there’s little rhyme or reason for those hot spots.

Lowe’s and Home Depot clearly prove that home improvement is one of those pockets of strength, fueled by a steadily improving housing market. With both stocks near multiyear highs, though, that might not be the best spot for an investor to go shopping just yet.

So where should an investor go shop for a bargain? Incredibly enough — and despite the struggles experienced by Ralph Lauren and Coach last quarter — there are luxury names that are doing well. At the top of that list is Michael Kors (KORS). In early August, the fashion brand name blew away first-quarter earnings estimates of 49 cents per share by posting a profit of 61 cents. Profits were up 82, revenue was up 54% and same-store sales grew 27%. Simply amazing.

So how did Kors do what Coach and Ralph Lauren couldn’t? All joking aside, Michael Kors is giving consumers exactly what they want … a new, fresh label, and a new, fresh look. The Polo and Coach labels are starting to feel a little dated.

Point being, there are going to be retailers that survive, and even thrive in, what likely will be a tepid second half of 2013. They’re going to be the exception to the norm, however, so pick and choose carefully. They’ll have to be the outfits that offer consumers something they absolutely don’t want to live without. Kors is doing that. So is L Brands (LTD) division Victoria’s Secret. Nobody “needs” anything either is selling, but they sure do want it.

Meanwhile, fewer and fewer people need or want what Target’s got to offer.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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