Buying in the retail sector continues to be selective. Consumer spending continues to show some promise as evidenced by the retail sales reading in January that pointed to a 0.4% rise in total spending, which, while down from the 0.7% rise expected, excluding autos, the reading advanced 0.7%, following a decline of 0.4% in December. While the readings in the retail sector don’t blow me away, I’m encouraged by the ability of consumers to want to spend.
And, with the country’s jobs market looking better with a declining unemployment rate, this should help to drive consumer confidence and the desire to spend in the retail sector. This is critical as every dollar spent creates jobs and additional spending down the road—a term known as the “multiplier effect” in economics.
Think about it this way. You go out to a restaurant and have a good meal. The restaurant attracts business, so it can remain in business and hire workers. The waiter you tip also has extra income to spend on goods and services. The waiter then goes and buys a shirt at the department store. The sales clerk ringing in the sale earns a wage and possible commission on the shirt. In turn, he or she goes out and spends and so on; hence the importance of the multiplier effect. Some economists estimate that each dollar initially spent can generate up to $7.00 in consumer spending in the retail sector, which is why it’s critical that consumers spend to get the economy going.
I cannot say I’m a big supporter of the retail sector, but the conditions have improved and will likely get better. The retailers are showing growth in spite of flat economic renewal. And whether they are big-box stores, discounters, or luxury retailers, there really is no specific area of the retail sector. Take a look at higher-end clothing retailer Michael Kors Holdings Limited (NYSE/KORS). The stock surged over 20% on Tuesday after posting a 68% year-over-year jump in its fiscal third-quarter revenues to $373.6 million versus $222.5 million in the year earlier fiscal third quarter. The jump is amazing given the uncertainties in the retail sector. Moreover, the key comparable same-store sales surged a superlative 38% in the quarter, which is simply astounding for a retailer.
Another retailer that I have been following for years that has also made numerous investors rich is fashion watchmaker Fossil, Inc. (NASDAQ/FOSL). I had initially recommended Fossil at the $20.00 level a few years ago. The stock traded at a record high of $134.98 on July 20, 2011, before retrenching to $69.57 on August 9, 2011. Buying over the last six months has been impressive, as the stock traded around $114.00 on Tuesday.
The key to investing in the retail sector is to search for companies that offer some sort of niche or a product that is differentiated from its competitors. I also like to look at retailers that may be currently in the dumps with investors, but that have strong brand awareness.
Another area that I like given the upcoming debut of Facebook is the social networking space, which I discussed in China’s Next Potential Moneymaker.