Investors in retailing stocks are increasingly concerned about which stores may suffer from lackluster sales and stock performance.
The hard sell of commercials is on, urging us to buy high-definition TVs and video games. Yet, no one is absolutely sure whether consumers will spend big bucks on gotta-have items or retreat to the solace of bargain racks.
For example, massive Wal-Mart Stores Inc. seemed to be running a bit scared when it ushered in the season by aggressively cutting prices on toys, electronics and appliances due to recent disappointing recent sales.
"Consumers are being picky and retailers mustn't take them for granted," said Anne Poole, a retail analyst with Kevin Dann & Partners LLC in New York. "I'm still bullish on this holiday season, but only specific retailers will do well and those doing badly won't improve."
Overall, retail stocks have been choppy for several months. They suffered through a difficult summer but have rallied since the beginning of September.
The National Retail Federation, an industry trade group, predicts a "subdued" 5 percent increase in holiday season sales over last year, to $457.4 billion. That compares with last year's 6.1 percent increase.
"Negative macroeconomic factors flipped to positive this year, including lower gas prices, heating costs and unemployment," said Adrienne Tennant, senior analyst for specialty retail at Friedman, Billings, Ramsey in Arlington, Va. "But while we expect a solid mid-single-digit holiday sales increase, good companies will get better and bad will get worse."
The "haves" need little introduction.
Because of strong sales momentum going into the season, American Eagle Outfitters and Bebe Stores Inc. are recommended by both Poole and Tennant. Poole also favors J. Crew Group Inc. and Coldwater Creek Inc., while Tennant likes Tween Brands Inc. and, as a turnaround, Talbots Inc.
"Business will be reasonably good, as is usually the case several years into an economic expansion, although there will be advertised specials and special events," said Edward Weller, senior retail/consumer analyst with ThinkEquity Partners LLC in San Francisco.
He sees a sales increase of 5 percent to 6 percent and, with relatively lean inventories, no rampant price-cutting. Weller recommends Dick's Sporting Goods because year-round excellence in selling to sports enthusiasts should carry through to the holidays.
Though many are wary about Wal-Mart's prospects, Weller likes it because it is organizing its stores to make it much easier to shop. He also favors Target Corp., due to fashionable merchandise and sales increases per store that exceed Wal-Mart's.
"The hot product for Christmas will be high-definition television because it still doesn't have much penetration in U.S. households and it is a distinct improvement over analog," said Robert Buchanan, analyst for consumer discretionary and consumer staples for A.G. Edwards & Sons Inc. in St. Louis.
But looking at retailing overall, Buchanan cautions that the same-store sales gains of 3 percent to 5 percent the past several quarters could slow to 2 percent to 3 percent and pressure profit margins.
Buchanan recommends upscale retailer Nordstrom Inc. because it has improved every significant aspect of its business in the past few years under the leadership of Blake Nordstrom.
"Everyone's watching video game-makers, with Sony PlayStation 3 and Nintendo's Wii coming out, and there's an expectation that consumers saved up for the holidays," said Charles Rotblut, senior market analyst with Zacks Investment Research in Chicago. "The question is whether consumers will focus on bargain shopping, as many people expect, or spend more on electronics that aren't discounted."
In the youth market, Rotblut said popular Guess Inc.is "firing on all cylinders" and continually beating analyst earnings estimates; Crocs Inc. is likely to expand popular clog footwear into other lines; and Under Armour Inc.has a strong reputation in high-end athletic apparel.
For those confident high-definition TVs and video games will save the holiday season, Best Buy Co. has become the standard bearer for retail electronics. It is working to improve customer service, has international potential and should benefit from many new products.
The "have-nots" this holiday season have yet to be determined, but there are warning signals.
For example, few expect impressive results from Gap, Pacific Sunwear of California Inc., Hot Topic Inc., Urban Outfitters Inc., Ann Taylor Stores Inc. or Chico's FAS Inc.
That's due to the possibility Pacific Sunwear, Hot Topic and Urban Outfitters have maxed out the potential of existing stores, that Chico's will take awhile to work through a corporate transition, and that Gap and Ann Taylor can't regain former niches.
"Gap tries to service such a large spectrum of the population that it doesn't hit any of the sectors very well," Tennant said. "Its message becomes diluted."
Convinced the "glaring weakness" this holiday season will be "anything house-related," Buchanan said the home business of Federated Department Stores Inc. is already struggling and do-it-yourself chains the Home Depot Inc. and Lowe's Cos. are coming under pressure.
Andrew Leckey is a Tribune Media Services columnist.