Retail is Tough, But Play it for the Holidays

There is no group that is more disjointed and lacking trend than retail.  Just when you think the group is going to fully tank, a Home Depot or Tiffany comes along and shows stellar numbers.  And when it appears consumer spending may be turning around, we see Abercrombie & Fitch or Guess lay an egg.  Retail is tough, but not impossible.  There have been all sorts of excuses about the rapid drops in consumer spending, yet we see auto sales peaking, Home Depot talking about big ticket items selling at a brisk pace and Signet Jewelers selling very high end merchandise over this last quarter.

I grant you that positive results are lumpy – Williams-Sonoma followed up a stellar quarter in May with a wretched one in August, bringing the stock back down to Earth.  How will it effect a name like Restoration Hardware, who reports this week and is coming off a stunning report in June?  For some of these retailers it’s a ‘crap shoot’ but for others there are some important trends taking hold.

Trying to game any stock around earnings is difficult but when talking retail it is nearly impossible to get it right consistently.  Just when you think a blowup will occur the company delivers a blowout quarter and squashes your dreams of a big payday to the downside.  There is a high correlation between spending and economic/job growth, yet even wealth creation has trickle down effects on the economy, especially retail.  Further, those not ‘effected’ much by a downturn are likely to continue purchasing goods regardless.  Where am I going here?  It appears high-end retail/products is where the action will be over the holidays and into early 2015.  Many of the trends in this group are positive and showing growth momentum which can be sustained by stronger buying power and price raises that stick.

Automakers continue to roll and sell vehicles.  Karmax and Autonation have been talking about pent up demand for months and are posting record numbers lately.  China is another area going unnoticed.   Still a strong economy,  the consumer’s appetite for high end goods is insatiable and many of our retailers will satisfy that need.

Some of the names in the high-end segment include products from Apple, GoPro, Deckers, Ralph Lauren, Nike, Tiffany, Steven Madden and Vanity Fair.  These products for the most part boast strong and growing margins that may not be vulnerable during a marked-down holiday period.  In other words, customers will buy products regardless of any discounts – that is sustainability.  Other names that should hold up well include Costco, Home Depot, Nordstrom and Macys.  One retailer than nobody seems to give credit for making a profits is Amazon.  Certainly the numbers do not lie, but they have such a large reach and are going to be key driver to online holiday shopping.  As Amazon goes, so goes the holiday season.

It is no coincidence the charts of most of these names are in good shape are flashing buy signals.

To sum up, retail is one of the more difficult groups to play – especially with a worried or fickle consumer.  However, this holiday season we are likely to see the biggest, best and brightest start to shine.  Don’t miss your opportunity.