Seven Ways to Make a Profit With Retailers
With consumer spending undermined over the past year by a sinking economy, mass layoffs and collapsing home prices, investors have worried about the financial health of retailers. At the start of the second-quarter earnings reporting season, conventional wisdom believed that discount retailers would do well while luxury retailers would take a hit as consumers focused on price and necessities.
Second Quarter Report Card
Most retailers have now reported their fiscal second quarter earnings. To the relief of investors, earnings have not been as bad as feared. Offsetting sharp declines in sales with store closings, inventory cuts and other cost-cutting measures, most retail stores beat second-quarter earnings forecasts.
While industry profits declined for the ninth straight quarter, the 8% year-over-year decline in second-quarter earnings was less than half the magnitude estimated at the depth of the recession in late March.
There were also some surprises. Discount store Wal-Mart (WMT) reported lackluster results, while competitor Target (TGT) beat analysts’ forecasts by nearly 20%. In high-end retail, Nordstrom (JWN) reported gains in line with analysts’ forecasts, while Saks (SKS) lost less than feared.
Among building supply retailers, Lowe’s (LOW) disappointed while Home Depot (HD) did not. In department stores, Kohl’s (KSS) reported a profitable quarter while JC Penney’s (JCP) broke even. Dillard’s (DDS) bled red ink at a slower pace than forecasts as same-store sales declined for the 12th straight quarter.
What lies ahead for retailers and retail stocks
Retail industry revenue appears to have stabilized, albeit at a low level. Retail stocks, as measured by the S&P Retail Index (RLX), are up nearly 24% since January 1. 2 outpacing the S&P 500’s 12% gain.
Many retail industry bosses are cautious in their outlook. There is little sign that consumers are rapidly increasing their discretionary spending. Unlike previous recessions, consumers are not relying on credit cards to finance their spending. On the one hand, consumers are deleveraging and saving more of their income. Second, financial institutions have raised lending standards and lowered credit limits.
The back-to-school shopping season has been relatively subdued so far. However, there may be some hope here, as several states go on tax holidays this weekend.
On the bright side, retail stocks also have some factors going for them.
Year-over-year sales comparisons for retailers will get easier in the coming months. Retailers won’t have to live up to last summer’s stimulus check-fueled sales. Also, the sharp drop in retail sales recorded during the fourth quarter of last year should help comparisons.
Following positive earnings surprises in the second quarter, analysts have raised their full-year earnings forecasts for many retailers.
Investors with a healthy dose of risk appetite may find some attractive opportunities in the retail landscape.
two mutual funds
Mutual fund investors can look to no-load funds like Fidelity Select Retailing (FSRPX) and Rydex Retailing (RYRIX).
Three ETFs
In the ETF space, SPDR S&P Retail (XRT) is a popular choice among investors. Other options include PowerShares Dynamic Retail (PMR) and Merrill Lynch Retail HOLDRS (RTH). Technically, RTH is a publicly traded mutual fund.
two actions
Investors looking for stock ideas may want to consider furniture retailer Kirkland’s (KIRK) and discount retailer 99 Cents Only Stores (NDN). Both companies that have put together an impressive series of positive earnings surprises in a challenging retail environment. KIRK and NDN are retailers who stop by Zack’s stock screen for ‘Two in a row 10% or more positive surprises’. KIRK trades at a forward P/E of roughly 15, while less volatile NDN shares change hands at a forward P/E of 19X.
