This holiday shopping season offers an unusual half-price sale for investors: the stocks of most of the retailers.
Even some of the proudest brand names are suffering due to the nation's reduced personal wealth, tight consumer lending, and weakening job market.
At some point, there will be a revival of the economy and many of the battered retailer equities, but there's little evidence of that now. If you move beyond the bright spot of Wal-Mart Stores Inc. (WMT), whose shares are up nearly 20 percent this year on a renewed focus on its core customers and a slowing of its store expansion, no one seems to have a viable strategy.
For example, you'd assume Best Buy Co. (BBY), the nation's No. 1 consumer electronics chain, would be enthusiastically formulating a game plan to capitalize on the recent bankruptcy filing and store liquidations of No. 2 chain Circuit City Stores Inc.
Instead, with its own stock price down more than 50 percent this year, Best Buy grimly has predicted a 5 percent to 15 percent decline in sales the remainder of its fiscal year ending Feb. 28.
"Even with Best Buy's biggest competitor liquidating 150 stores, where is the opportunity in that for Best Buy in such a bleak environment?" asks Stacey Widlitz, specialty retail equities analyst with Pali Research, in New York. "Consumers who want to finance big-ticket items such as high-definition TVs will also find that credit-card issuers are increasing their standards and offering less attractive terms."
There isn't enough consumer demand to recommend the stock of Best Buy right now, Widlitz says, though long-term investors can expect an eventual comeback.
"Most retailers had relatively good cash flows going into this economic downturn, though a lot of small to medium-sized companies that rely on lines of credit have seen them drying up," says Scott Brown, chief economist and senior vice president for Raymond James & Associates. "Another problem is job losses will get much worse, with unemployment rising to 7 percent next year and maybe 8 percent by mid-year."
Current economic data offer neither clarity nor signs of a bottom because we're still "in the middle of the storm," Brown says.
A more positive scenario offered by some is that hard times will bring consumers back to essentials with modestly priced, but extensive, holiday gift giving to overcome their recession blues.
"If you've just disappointed your wife by not buying her a 62-inch flat-screen TV, you can still buy her a Ralph Lauren cashmere sweater," says Richard Jaffe, New York-based managing director and soft-lines retail analyst with Stifel Nicolaus. "I think it is going to be a good Christmas, even though 'good' is a relative term, because the feelings consumers get from giving and getting gifts is especially important this year."
Consider buying shares of solid retailer names in niches that will endure long after recession passes, he advises, because price tags are too low to resist.
Jaffe recommends purchase of these marked-down retailer equities:
The TJX Cos. (TJX), whose stock is down more than 20 percent this year, is the nation's largest off-price retailer of brand-name apparel and home fashions, with around 2,600 stores globally. While growth of its T.J. Maxx and Marshalls chains has slowed, it should benefit from shoppers trading down from department stores.
"TJX is well-positioned to win over more customers this difficult holiday season," Jaffe says.
Kohl's Corp. (KSS), down more than 30 percent, operates more than 900 specialty department stores nationally with middle-income customers the focus of its moderately priced merchandise. Its private-label goods, which feature a higher profit margin, represent more than one-third of sales.
"Kohl's benefits from exclusive distribution of prestige brands such as Fila, Chaps by Ralph Lauren, Simply Vera (Wang), and Tony Hawk by Quicksilver," Jaffe says.
Abercrombie & Fitch Co. (ANF), down more than 70 percent, has more than 1,000 stores in the U.S., Canada, and United Kingdom. Besides the stores that bear its name, it operates Hollister, Abercrombie Kids, Ruehl, and also Gilly Hicks. It is expanding overseas, and domestically, its Hollister stores offer great growth potential.
"If you didn't buy your son a BlackBerry, you might buy him a really cool shirt at Abercrombie & Fitch," Jaffe says.
Widlitz, a believer in the power of the little blue box and the Tiffany & Co. (TIF) brand, is recommending its stock.
Down more than 50 percent this year in a slowing market for luxury goods, Tiffany sells fine jewelry, china, accessories, and fragrances through more than 180 retail stores here and abroad, as well as through its Web site and catalog. It has sold innovative merchandise in the U.S. for 170 years and has expanded into selling non-Tiffany-brand items through its Iridesse stores.
"You want to take advantage of names that are great brands with store growth and earnings power," Widlitz says. "Tiffany is one that really stands out."
Finally, the youth-oriented stores Urban Outfitters Inc. (URBN) and J. Crew Group Inc. (JCG) receive "hold" recommendations from Jaffe for now, based on current stock prices. Chains that he expects will struggle throughout this downbeat holiday season include Talbots Inc., Coldwater Creek Inc., Gap Inc., Men's Wearhouse Inc., and Casual Male Retail Group Inc.
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