Retail Stocks: Showing Some Improvement

We're seeing some improvement in the area of retail and retail stocks. George gives you his investment advice on the types of stocks you may want to look into.I must admit the fact that consumers continue to spend despite any strong or sustained job growth and continued weakness in housing is encouraging. With consumer spending accounting for two-thirds of GDP, retail sales will eventually be stronger when the jobs and housing areas improve, albeit it will likely take over a year.

The headline Retail Sales reading for July increased 0.52%, in line with the consensus estimate, but above the upwardly revised 0.3% in June. It was the biggest increase since March and clearly offers some optimism that the economy may avoid another recession.

Excluding the auto portion, Retail Sales increased a slightly better than expected 0.5% versus the consensus estimate of 0.2% and above the upward revised 0.2% in June.

While we still need to see a sustained upward trend, the reading was encouraging. And with oil below $90.00 a barrel, gasoline prices have declined, which will add some disposable income for consumers to spend on goods and services. Of course, consumers are fickle and will continue to search for the best bargains out there.

At this juncture, I’m selective with retail stocks. My investment advice, my best stock advice, to you would be to stick with the leading discount bellwether retail stocks.

In the large-cap area, these stocks include Wal-Mart Stores, Inc. (NYSE/WMT), Target Corporation (NYSE/TGT), and Costco Wholesale Corporation (NASDAQ/COST).

Costco reported a 10% jump in its key same-store sales reading in July following a 14% surge in June. Net sales for July surged 15% year-over-year. The results are consistent and continue to show steady growth; but, for that extra bit of growth, you should look at the smaller discount retail companies.

Costco, for instance, has a market cap of $31.79 billion and is estimated to report sales growth of 13% and eight percent for the FY11 and FY12, respectively.

For comparison, take a look at small-cap PriceSmart, Inc. (NASDAQ/PSMT), an operator of 28 warehouse clubs in 11 countries in Central America and the Caribbean. PriceSmart reported a booming 20.9% increase in its same-store sales in July, along with a 23.8% year-over-year rise in July net sales. The reading was the 21st straight monthly increase. These are well above the growth metrics for Costco. Consider the comparative sales growth for PriceSmart, which is 22.3% and 14.2% for the FY11 and FY12, respectively. The growth estimates are probably conservative and could really take off if the expansion continues.

Another interesting discounter is large-cap Dollar General Corporation (NYSE/DG), which operates a staggering 9,300 stores across 35 states. Dollar General has reasonable valuation, trading at 12.26X FY13 earnings per share and a price/earnings growth ratio of 0.80. The stock has above-average price appreciation potential for investors.

When the housing and jobs areas pick up, I expect spending to increase quicker, especially on the non-essential Durable Goods.

My favorite in the retail space continues to be the discounters and big-box stores. The big-box stores are now selling a broad range of electronics and are adding to their product line. This will offer consumers a one-stop place for shopping and make more money for these companies.