From Discount to Big Box: Some Retailers to Watch
Wednesday, November 28th, 2012
By George Leong, B.Comm. for Profit Confidential
It’s now officially the holiday shopping season after a relatively decent Good Friday and Cyber Monday. Online spending, according to the Adobe Digital Index, is estimated to reach record sales of around $2.0 billion, up 17% year-over-year. (“Cyber Monday Sales Climb to Record $2 billion,” BGR, last accessed November 27, 2012.) If the numbers are any indication, the retail sector could be in for a strong holiday shopping season over the next four weeks. We know shoppers are the most confident since February 2008, as the Conference Board consumer confidence reading came in at 73.7 in November. Add in the continued uptrend in home prices and, hopefully, job creation into 2013, and you have a good and much-improved climate for the retail sector.
Given what will be higher consumer spending as we head into 2013, the retail sector will definitely be a place to park some investment capital. I recently talked about some of the leading luxury stocks to look at, especially as a play on the strong retail sector market in China. (Read “Luxury Stocks That Are Leading the Pack.”)
The retail stocks that I envision to be successful will be both the manufacturers and the retail outlets.
For the more conservative investors looking for steady growth and dividend income, at the top of my list in the retail sector is Wal-Mart Stores, Inc. (NYSE/WMT) and Target Corporation (NYSE/TGT). Wal-Mart is an excellent global retail sector play, but it will need to get deeper into China to really make a dent and drive the share price higher. Target is intriguing, as the “poor cousin” of Wal-Mart has embarked on its first international foray; with its previous acquisition of the Zeller’s stores across Canada, Target will look to take some market share away from Wal-Mart. Target is set to open its first stores in Canada by 2014, but Wal-Mart is battling with the building of numerous superstores across the country that will also compete against hyper-store Costco Wholesale Corporation (NASDAQ/COST) in the big-box retail sector.
And, as I recently discussed, I continue to like the discount stores, such as Dollar General Corporation (NYSE/DG), Dollar Tree, Inc. (NASDAQ/DLTR), and Family Dollar Stores, Inc. (NYSE/FDO). Another interesting discount play with a focus on pre-teens and teens is Five Below, Inc. (NASDAQ/FIVE), which debuted in July and is worth a look for speculators looking for an aggressive retail sector play.
PriceSmart, Inc. (NASDAQ/PSMT) is worth a look in the small-cap stocks space, and it has already returned some impressive gains.
In the growing global jeans market, including China and India, American Eagle Outfitters, Inc. (NYSE/AEO) and The Gap, Inc. (NYSE/GPS) are good picks. The Gap has really turned around its operations and appears to be heading higher and drawing shoppers back into the retail sector.
An interesting retailer of jeans and casual wear is True Religion Apparel, Inc. (NASDAQ/TRLG). You have probably seen the True Religion stores in malls. There are 125 branded stand-alone stores, including 109 stores in the U.S., five in the U.K., four in Germany, three in Canada, three in Japan, and one in the Netherlands. The company also has a massive distribution network, comprising 50 countries on six continents. Since 2002, sales increased in nine straight years, from a mere $10,000 in 2002 to nearly $420 million in 2011. The growth could be higher if the brand gains acceptance in Hong Kong and China, where the company signed an agreement for retail and wholesale expansion.
The key to stock market success in the retail sector is to search for companies and brands that show steady growth, especially those with exposure in China.