Why it Could Be the Most Wonderful Time of the Year

“Calling the Trend” Column, by George Leong, B. Comm.

It’s that time of the year again, when consumers look for bargains and begin shopping for the holidays. Known as “Black Friday,” the day following Thanksgiving, it is an especially important time for retailers and the economy. For many retailers, Black Friday represents a good indication of the strength of consumer spending. Some retailers record more sales during the next month than for the whole other 11 months. Given the importance of the economic rally at this time, investors will be looking for strong consumer spending.

At this time, consumer confidence remains somewhat fragile, which impacts buying habits, especially given that jobs and housing remain weak. The retail sector is showing signs of improving, so watch to see if it continues now that we’ve entered the most important shopping period of the year.

J. Crew Group, Inc. (NYSE/JCG) and high-end jewelry retailers Tiffany & Co. (NYSE/TIF) have reported decent results. In what was a surprise, it that appears people are continuing to spend on high-end luxury items. TIF beat on both earnings and revenues, along with raising its 2010 EPS; yet global sales are also predicted to fall eight percent in 2010. At 20 times its FY10 EPS and a PEG ratio of 2.14, TIF is not cheap and could be vulnerable to selling.

The key area to watch for this holiday shopping season will continue to be online sales. Companies that dominate their respective markets will win, including companies such as Wal-Mart Stores, Inc. (NYSE/WMT) and Amazon.com, Inc. (NASDAQ/AMZN).

Wal-Mart is an interesting situation due to its dominance and sheer size. The company has not become the Death Star of retailing for no reason. It seeks advantages and then goes in for the kill. Just take a look at some of its current strategies. Wal-Mart is challenging Amazon.com in the area of media, including heavy discounts on books and DVDs/CDs. This is a lucrative market and Wal-Mart wants more of it.

Wal-Mart is also taking shots at electronics retailer Best Buy Co., Inc. (NYSE/BBY) with heavy discounting on electronic items. BBY is best of breed, but don’t count Wal-Mart out, since in reality it could easily swallow Best Buy if it wanted to. Wal-Mart’s astounding market-cap of $211 billion is well above the $58.0 billion of AMZN and $18.0 billion of BBY. The reality is that you don’t get that big if you are not a retail predator and Wal-Mart clearly is. If Wal-Mart wants in, it can get in. The only thing that could hold it back is that it thinks it can do the job better and really hates spending money on acquisitions; as such, it would rather try to take market share away.

Just like McDonald’s Corporation (NYSE/MCD) is the king of fast food, Wal-Mart rules in retailing.