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Retail stock rally leaves few bargains for investors

Published 11/26/2016, 04:57 AM
© Reuters. Traders work on the floor of the NYSE in New York
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By Noel Randewich

SAN FRANCISCO (Reuters) - Wall Street expects consumers to open their wallets a little wider this holiday shopping season but bargains among red-hot retail stocks could be hard to find, especially as profit growth proves elusive for many big names.

Retailers, including Best Buy, Kohls Corp and Macy's, that were pummeled in last year's disappointing holiday quarter have seen their shares surge recently on expectations that the worst is over, and that an improved economy will send more shoppers into their stores.

Those gains in recent days have helped push the S&P 500 to a record high.

With U.S. consumers bolstered by wage gains and higher employment, holiday sales will grow 3.6 percent, National Retail Federation predicts. Last year's growth was a modest 3.2 percent, short of the federation's 3.7-percent growth forecast.

But some investors believe a healthy holiday shopping season and higher sales are already built into share prices, with some surging in the past few weeks. In November alone, shares of Best Buy and Macy's have each jumped more than 20 percent, while Kohls' stock is having its best month in more than 16 years with a 25 percent rise.

"We do not necessarily expect these sales gains to translate into outperformance for the consumer sectors, but we suspect they may be good enough to not spook markets," wrote LPL Financial Chief Investment Officer Burt White in a recent research note.

Not helping matters for stores, mall crowds were relatively thin on Friday in an underwhelming start to the holiday shopping season.

A selection of 15 large retailers that are big Black Friday players, including traditional brick-and-mortar chains and online heavyweight Amazon, averaged a total return of 12 percent this year, including dividends, according to Thomson Reuters data. Best Buy's stock has jumped 55 percent in 2016 and Macy's surged 26 percent.

Expectations that tax cuts under President-elect Donald Trump could leave consumers with more disposable income have also fueled gains in the retail sector, with the SPDR S&P Retail exchange traded fund rallying 10 percent in November.

Since the election, that fund has been a big outperformer, outpacing most other industry-tracking funds with a 12.2-percent gain. The wider S&P 500 is up just over 3 percent in the same period.

That's made it more difficult to find bargains, said Telsey Advisory Group analyst Joseph Feldman. He recommends Home Depot (NYSE:HD), which is benefiting from a resilient housing market, and Dick's Sporting Goods, which stands to gain market share following the recent bankruptcy of rival Sports Authority.

Macy's, Nordstrom (NYSE:JWN) and other mall retailers have suffered heavily in recent years due to relentless competition from Amazon.com (NASDAQ:AMZN), a trend expected to continue even as retailers refine their own online sales strategies. A consumer shift away from expensive apparel and toward vacations, home improvement and electronics has also crippled many retailers.

Still, recent forecasts from retailers are encouraging: After reporting better-than expected quarterly profit on Nov 16, Target said it expects consumer spending to remain strong through the holidays, while Macy's and Kohls have predicted an acceleration this quarter that could help both revive their lagging bottom lines.

Macy's has seen year-over-year profit declines for six quarters in a row. Kohls' profit rose last quarter but had fallen for the previous four.

The 15 Black Friday retailers tracked by Reuters are expected on average to grow their revenue by 3.3 percent in the fourth quarter, which would be better than the 2.5 percent increase the year before, according to Thomson Reuters data. But without online shopping goliath Amazon, the group's revenue is seen edging up just 1.7 percent, slightly better than its 1.1 percent increase last year.

Despite Target's upbeat comments on holiday spending, its fourth-quarter revenue is seen falling 3 percent, with its net income shrinking 0.8 percent. Wal-Mart Stores (NYSE:WMT) on average is expected to report a 16-percent drop in net income, while Nordstrom's net income is expected to fall 2.8 percent.

© Reuters. Traders work on the floor of the NYSE in New York

Best Buy, which is trading near a six-year high, has said it expects same-stores sales to rise or fall by 1 percent in the current quarter.

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