Declining oil prices and the realization that holiday sales might turn out better than expected buoyed retail stocks Wednesday — the first day of trading of 2007.
Analysts were mostly bullish, at least in their short-term outlooks, on how the retail sector would perform this year, after gaining about 10 percent on average in 2006.
For now, though, Wall Street has its sights set on December same-store sales, due out today. American Eagle Outfitters, Nordstrom, J.C. Penney, Kohl’s and Limited Brands are expected to perform well.
Trading Wednesday was robust and mixed. Out of the gate, trading volume was heavy, and the S&P Retail Index leapt 2.1 percent to 509.67 in the midmorning session. As the day progressed, valuations retreated after investors read the minutes from the last Federal Reserve meeting that revealed concern about the housing market.
After gaining more than 100 points earlier in the day, the Dow Jones Industrial Average closed Wednesday up 0.09 percent, at 12,474,52. The S&P Retail Index finished the day up 0.8 percent, at 502.97, as Wall Street weighed the impact of a late-December sales surge.
Investors digested several reports from analysts that said steep markdowns and warm weather weighed down holiday sales. But the equity research firms said results likely were offset by the introduction of “transitional” apparel late in the month as well as strong gift card sales. Brean Murray, Carret & Co. analyst Eric Beder summed up the holiday shopping season as “not overly merry, but still pretty bright.”
Morgan Keegan Equity Research estimates gift card sales rose 35 percent this year over last. CIBC World Markets analyst Dorothy S. Lakner said in a research note that “more so than in past years, many retailers are counting on gift cards to save the season and help meet fourth-quarter goals.” The sales volume on gift cards is estimated at $24 billion this year.
Lakner noted that American Eagle, Abercrombie & Fitch, Guess and Nordstrom are now positioning “spring transitional merchandise” in their stores — at full price.
Beder offered a Dickensian view of the performance of retail stocks in 2007. “I look at 2007 as [a year that is going to be] a tale of two seasons,” he said, explaining that spring last year was weak. He said the merchandise “just wasn’t right,” so the first half of 2007 is up against easy comps, “and we should see strength.”
But the second half is up for grabs, the analyst said. Fall 2006 was very strong, so fall 2007 may be tough to compare against. “I would own retail stocks going into 2007, but not as aggressively going out of the year.” Caché, Guess, True Religion and Bebe should be top performers, he predicted.
CL King & Associates analyst Mark Montagna said he was positive about the outlook for retail stocks this year. “I gave a high rating to most of the companies I cover,” he said. “I see strength for Limited Brands due to the continued success of Victoria’s Secret and Bath & Body Works. Also, I expect the integration of La Senza to help and the possible spinout of Limited’s apparel divisions, since the momentum is there.”
Harry Ikenson, analyst at Soleil Group, said, “The seasonality of the stocks [in retail] typically bodes well for the early part of the year to spring. That’s because Christmas is out of the way and [instead of being] concerned with what will happen, investors are looking for stocks that they think will perform better.”
Ikenson said most of the specialty retail stocks that he covers seemed to end the year relatively clean, inventory-wise. “Even those underperformers will do heavy discounting to get rid of the inventory,” he said. Ikenson explained that the majority of promotions seemed to have been planned, and most of those that were unplanned were in sweaters and outerwear, which were affected by the unseasonably warm weather during the holidays.
“The two standouts that we think should be poised for a good 2007 are Bebe and Caché. We think that we are in the early stage of a new fashion cycle. Bebe historically has done an excellent job in staying with the fashion curve and ahead of the competition. Caché has the largest concentration in dresses, about 22 percent, in a new fashion cycle where we think dresses are a key ingredient,” Ikenson said.
Jim Rice, analyst at Susquehanna Financial Group, said, “I think we will probably be hearing about a soft landing in the economy this year, so it will probably be an OK year, with maybe the second half slightly better than the first. Right now, we’re seeing a bit of a slowdown with the housing market, but we got lucky with the weather because that kept oil prices down. Consumers have pulled back a little and will likely do so in the first half, but I think they will be back in the second half. Consumers love to spend, and if they don’t spend for a while, you’re not going to need much of a catalyst to get them back into the stores to spend.”
Rice said he thought department stores would continue to do better than the specialty stores. “I’ve been tracking retail for a long time, and you always hear about the department stores being dead, but they keep coming back,” he said. “This year, I think Nordstrom has done a great job. Their numbers will be great when they report comps, and I think Saks is now a bit of a turnaround story. Saks still has a good name and they got the merchandise right.”
Rice added that the department stores did better because they had a more varied assortment than the specialty chains, where sales were affected by unsold winter merchandise and accessories.