Attention Retail Shoppers – US-FOREX.US
Sales may be down while unemployment is up but retailers are doing well, nonetheless. Since the start of the year the sector has walloped the broad market by a wide margin. The SPDR S&P Retail ETF
gained 55% since Jan. 1 while the S&P 500 is up just over 10%. Now, with the biggest retailers reporting quarterly earnings this week and next, Deutsche Bank analyst Bill Dreher Jr., says there’s good reason to think investors will be pleasantly surprised.Like other sectors of the economy, retail chains responded to the recession, and falling sales, by slashing inventories and costs. Macy’s
, Kohl’s
, Saks
and J.C. Penney
all rushed to reduce overhead and get merchandise off the shelves in case the recession turned into a full-blown depression, notes Dreher. The result is that now, with sales no longer dropping fast, chains have far less clearance inventory that they need to discount.Stores also saw some unexpected benefits this summer. As shoppers traded down form high-end department stores, mass-market shops picked up some business while their own customers moved to in-house brands, which are more profitable. J.C. Penney gets 52% of sales from private-label merchandise, while Kohl’s gets 42% and Macy’s gets 40%. They should benefit from the trend.Tough times also mean opportunities for solid companies with cash to spend. With some regional and local chains going out of business, Dreher estimates there are 21.4 billion in sales that the biggest national chains can grab. Kohl’s recently bought dozens of stores from bankrupt Mervyn’s, for example.That’s not to say retail firms don’t face a tough environment. Unemployment has soared to over 9% so Americans are saving more, roughly twice as much as last year. Shoppers are hunting for bargains, not splurging, so don’t expect sales to accelerate, warns Dreher. Instead, look for a boost to earnings at companies that have aggressively reduced costs and done away with waste.Dreher likes Macy’s, which reports earnings Wednesday morning. He’s betting the department store will announce quarterly profit of 16 cents share, two cents better than the consensus among Wall Street analysts. A trimmed-down organization should save 400 million a year eventually and a lower dividend has improved the firm’s cash position. Weak rivals could also give it an advantage.
Another buy rating from Dreher is the big daddy of retailers: Wal-Mart
. The world’s largest store reports earnings Thursday and Dreher predicts a quarterly profit of 86 cents a share, in line with the consensus. Wal-Mart has turned its focus from opening stores to capturing more shoppers at existing ones with in-store foods brands, which are especially profitable. Wal-Mart’s rock-bottom prices also help.