With consumer spending sapped in the last year with a sinking economy, massive layoffs, and tanking home values, investors happen to be worried about the financial health of stores. At the beginning of the 2nd quarter earnings report season, conventional knowledge thought that off-cost retailers would fare well while luxury retailers could be hit as consumers centered on cost and requirements.
Second Quarter Report Card
Most retailers have finally reported their fiscal second quarter earnings. Much towards the relief of investors, earnings haven’t been badly as feared. Offsetting steep declines in sales with store closures, inventory cuts, along with other cost reduction measures most stores beat second quarter earnings forecasts.
While industry profits declined for that ninth straight quarter, the 8% loss of year-over-year second quarter earnings was under half the magnitude believed in the depth from the recession at the end of March.
There have been some surprises too. Discounter Wal-Mart (WMT) reported ho-hum results while competitor Target (TGT) exceeded analysts’ forecast by nearly 20%. In high-finish retailing, Nordstrom (JWN) reported profits consistent with analysts’ forecast while Saks (SKS) lost under feared.
Among building materials stores, Lowe’s (LOW) disappointed while Lowe’s (HD) didn’t. In shops, Kohl’s (KSS) reported a lucrative quarter while J. C. Penney’s (JCP) results broke-even. Dillard’s (DDS) bled red ink in a lower rate than forecasts because the same-store sales declined for that twelfth straight quarter.
What’s Ahead for Retailers and Retail Stocks
Retailing industry revenues have the symptoms of stabilized although in a low-level. Retail stocks as measured through the S&P Retail Index (RLX) are up nearly 24% since Jan. 2 outpacing the S&P 500’s 12% gain.
Many retail industry leaders are careful within their outlook. You will find couple of signs that customers will rapidly improve their discretionary spending. Unlike previous recessions, individuals are not counting on charge cards to invest in their spending. For just one, individuals are de-leveraging and saving much more of their earnings. Second, banking institutions have elevated lending standards and decreased credit limits.
The rear-to-school shopping season continues to be relatively subdued to date. There might be some hope here however as several states use a ‘tax holiday’ a few days ago.
Around the better side, retail shares in addition have a couple of factors opting for them.
Year-over-year sales comparisons for retailers are in position to become simpler within the several weeks ahead. Retailers won’t have to determine facing sales boosted by last summer’s stimulus checks. Further, the steep fall in retail sales cratered during last year’s 4th quarter will help comparisons.
Following positive earnings surprises in second quarter, analysts happen to be raising their full-year earnings forecasts for a lot of retailers.
Investors having a healthy dose of risk appetite will find some attractive possibilities within the retailing landscape.
Two Mutual Funds
Mutual fund investors look at no load funds like Fidelity Select Retailing (FSRPX) and Rydex Retailing (RYRIX).
Within the ETF space, SPDR S&P Retail (XRT) is a well-liked choice among investors. Other available choices include PowerShares Dynamic Retail (PMR) and Merrill Lynch Retail HOLDRS (RTH). Technically, RTH is really a unit trust that trades around the exchange.
Investors searching for stocks ideas can consider furniture store Kirkland’s (KIRK) and discount store 99 Cents Only Stores (NDN). Both firms that have come up with a remarkable string of positive earnings surprises inside a challenging retail atmosphere. KIRK and NDN are retailers making it through Zack’s stock screen for ‘Two consecutively 10% or even more Positive Surprises’. KIRK trades in a forward P/E of approximately 15 as the less-volatile NDN shares rotate in a 19X forward P/E.