A year after the market bottomed out, investors are ready to believe in a retail rebound.
Shares in the industry are still rushing ahead. The S&P Retail Index inched up 0.4 percent Monday to 436.89 — a level not seen since December 2007 — and Abercrombie & Fitch Co., J. Crew Group Inc., Macy’s Inc., Limited Brands Inc. and Nordstrom Inc., to name but a few, all reached 52-week highs. Retail shares hit their recession low of 207.49 in November 2008, while the Dow Jones Industrial Average marks a year since its nadir today.
But unlike last year, when cash preservation and cost cuts drove stocks, investors appear to be betting stronger-than-expected February sales and employment data are pointing to better times and fewer roadblocks ahead — a real, rather than a relative, rebound.
“It’s a time of year for hope in retail,” said David Strasser, equity analyst at Janney Montgomery Scott. “You don’t really have to pay the piper until the fourth quarter. The balance sheets are in great shape.”
Strasser said investors also are counting on Washington policy makers to continue to chart a course that encourages spending. “No one’s taking money away from the consumer heading into the midterm elections,” he said.
Retail stocks have traditionally led markets out of recessions since merchants are among the first to feel a turn in consumer spending. That rationale seems to be holding sway even though the economic recovery has been slow to take hold and high unemployment and general caution have restrained spending.
Nineteen of the 27 retailers tracked by Thomson Reuters topped comparable-store sales estimates in February and the overall 4 percent increase was the strongest rise since November 2007. In addition, fourth-quarter earnings generally have come in above analysts’ carefully managed expectations.
But the sector and the economy still have a long way to go until they are on undeniably solid ground.
“The consumer isn’t roaring back,” cautioned Paul Lejuez, analyst at Credit Suisse. “They definitely did a little bit better in February. I don’t know that it’s going to get much easier going forward.”
Lejuez said some retailers would have increasingly difficult gross margin and sales comparisons in the second half of this year.
“It certainly pays to maintain a cautious/skeptical approach to these retailers,” he said. “I don’t think it’s one size fits all.”
And although the days when major banks were failing right and left and the future of many retailers seemed in question now have passed, David Bassuk, managing director at consultancy AlixPartners, said some retailers are still fighting for their lives.
“There’s a big market share fight going on right now,” Bassuk said. “We’re still seeing a lot of companies that have weathered the storm, but what they’ve really done, especially those that have financial balance sheet issues — they’ve kicked the can down the road a bit.”
Bassuk said consumers have bounced back, but that March and April sales would reveal much more about the enduring strength of the spending rise.
“I do think people are getting a little bit out in front of themselves,” he said. “Everybody’s kind of bouncing off the bottom right now. It’s sparking some enthusiasm, but when you really look at the fundamentals, these companies have not really changed.”
Risks aside, the investor enthusiasm for retail has lasted through continued job losses and surpassed the expectations of many. The bond market also has gotten in on the game, in a more sedate way.
Rosemary Sisson, debt analyst at Knight Libertas, said the market for retail debt has performed well and appears to be taking a longer view than it has recently.
Sisson said the financial crisis “woke up” some of the companies, and they are taking a more cautious financial approach, pleasing debt holders.
“These companies are positioning themselves to make the equity markets happy,” she said. “In the past, the stock guys wanted stuff we didn’t want…they wanted grow, grow, grow. The equity markets are now a bit more conservative.”
Among the companies rising to new highs for the last year, shares of J. Crew increased 3.9 percent to $47.40; Macy’s, 2.9 percent to $21.04; Abercrombie, 2.6 percent to $43.43; Limited, 0.8 percent to $23.47, and Nordstrom, 0.8 percent to $39.33.
The Dow slipped 0.1 percent, or 13.68 points, to 10,552.52.
But overseas markets were buoyed Monday by last week’s U.S. employment report, in which the unemployment rate held steady at 9.7 percent and job losses were held to 36,000. The Nikkei 225 rose 2.1 percent to 10,585.92 in Tokyo as the Hang Seng Index advanced 2 percent to 21,196.87 in Hong Kong and the SSE Composite Index rose 0.7 percent to 3,053.23 in Shanghai.
European traders nudged the FTSE 100 up 0.1 percent to 5,606.72 in London and the CAC 40 dipped 0.2 percent to 3,903.54 in Paris.
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