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Aug 26, 2009
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Will retail stock buying continue?

By
Reuters
Published
Aug 26, 2009

By Brad Dorfman

CHICAGO, Aug 26 (Reuters) - Retail stocks have had quite a run over the past several months as cost cuts and a big push to tighten inventories have helped many companies in the sector beat Wall Street's earnings estimates despite falling sales.



The Standard and Poor's Retail Index .RLX is up almost 62 percent since early March and there have been some positive economic signs of late, including Wednesday 26 August's stronger-than-expected report on new home sales and a big jump in auto sales spurred by the "Cash for Clunkers" program.

Retailers will also be facing much easier sales comparisons from the second half of 2008 when the economy was already in the throes of a recession and the stock market tumbled.

But consumers are still facing tighter credit, shrunken retirement funds and high unemployment rates.

Sales at stores open at least a year in August, smack in the middle of the key back-to-school season, are expected to fall an average of 6 percent, according to analysts surveyed by Reuters Estimates.

So should retail stocks still be in fashion, or are they on their way out?

"COILED SPRINGS"

"Not only is the bar very low with respect to same-store sales comparisons, but these companies have spent the last year trimming costs and tightening inventories, and these companies are now like coiled springs ready to expand at any hint of stabilizing demand or increased demand," Federated Investors portfolio manager Lawrence Creatura said.

"Stocks follow earnings and earnings are likely to be better as we move through this year," he said.

Consumers have continued to spend at two types of stores: those offering value or those offering products that are different and exciting to consumers, Creatura said.

"It has to be cheap, or it has to be special," he said, citing Apple Inc's (AAPL.O) Apple Stores as "special."

"If you have differentiated product, consumers will pay for it," he said. "Those are the stocks that will be more successful in the back half of the year."

Among sectors poised to do better are footwear and luxury items, he said.

WHO HAS MONEY TO SPEND?

In order for the coiled springs to spring, consumers need money to spend, and Patricia Edwards, founder and chief investment officer at Storehouse Partners, does not think consumers have that money, especially to the point of justifying further gains in most retail stocks.

For example, shares of J.C. Penney Co Inc (JCP.N) have more than doubled since early March, Nordstrom Inc (JWN.N) is up 136 percent and Abercrombie & Fitch Co (ANF.N) is up 91 percent.

"What has really changed for these guys?" Edwards said.

"The big thing I keep hearing (from sell-side analysts) is they cut their costs and when the consumer comes back its like a coiled spring and there's going to be leverage.

"My problem with that is the consumer is not coming back."

She said home values have fallen, so consumers can no longer count on home equity to fuel spending, unemployment is still at 9.4 percent and 401ks have fallen sharply.

"To expect that things are going to jump right back is absolutely ludicrous in my mind." Edwards said.

She said discount and low-priced retailers like TJX Cos Inc (TJX.N) and Ross Stores Inc (ROST.O) should do well.

"It's all about stock picking at this point," she said. (Reporting by Brad Dorfman. Editing by Robert MacMillan)

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