What Disappointing November Retail Sector Results Mean for Stocks in 2013

Results Mean for Stocks in 2013Thanksgiving is a time of food, family, and football. It’s also the beginning of the holiday shopping season. With Black Friday being a critical day for the retail sector, many analysts are paying close attention to the results coming in, as the numbers from the retail sector will determine how investor sentiment will shift over the next few months.

Many analysts and companies themselves had hoped that the retail sector would do quite well this holiday season. It appears that the holiday shopping season is off to a weak start, as sales were far lower in November than many were expecting.

Sixteen companies in the retail sector, followed by Thomson Reuters, recorded only a 1.6% increase in sales for November at stores that were open at least a year, as compared to expectations of a 3.3% increase. These numbers include Black Friday. (Source: “Sales at Nation’s Retailers Fell Short of Expectations in November,” The New York Times, November 29, 2012.)

Some of the firms in the retail sector that are disappointing for investor sentiment include Kohls Corporation (NYSE/KSS). Kohls reported a 5.6% decline in sales, versus expectations of a 1.9% increase. (Source: “Sales at Nation’s Retailers Fell Short of Expectations in November,” The New York Times, November 29, 2012.) That was certainly a hit to investor sentiment, as can be seen by the dramatic drop in the share price.

KSS Kohls Corp stock market chart

Chart courtesy of www.StockCharts.com

Not all stocks in the retail sector experienced a decline in same-store sales. Costco Wholesale Corporation (NASDAQ/COST) recorded a six-percent increase in same-store sales, beating analyst’s expectations. Investor sentiment became increasingly bullish once Costco reported the strong numbers.

COST Costco Wholesale Nasdaq stock market chart

Chart courtesy of www.StockCharts.com

What this really comes down to when looking at the retail sector is that there will be some winners and some losers, and one can’t look at the market segment as homogeneous. Investor sentiment will not be evenly spread throughout the retail sector. Firms that are strong will get stronger, and the companies on the margin will lose out.

I believe that as the economy continues to struggle, we will see a growing disparity between the stocks in the retail sector that are able to offer good value. “Good value” is a term that conveys either a strong product brand at a reasonable price or a very inexpensive low-end product.

The stocks in the retail sector that sell to the middle-income consumer will have difficulty, and investor sentiment will continue to move away from these companies and into the value proposition firms. Costco is a name I’ve supported for a long time, because it blends great products and a superior price point, which is why investor sentiment remains strong in the name.

I think that any time investor sentiment gets hit over a short-term problem in the retail sector, for companies that are able to provide a value proposition, this would be a good entry point for the long-term investor. Being opportunistic in short-term pullbacks is one way to generate above-market rates of return.