Retail Buys Can Be Found in This Market

As our Zacks senior retail industry analyst Rob Plaza, CFA gears up for another earnings season, we thought we'd check in to gauge how much pain he is expected to feel. He even gave us a couple Buys in this downtrodden industry.

The first quarter for retailers is about to end. Though it might hurt to hear it, what are your expectations?

Not surprisingly, I expect to see a large number of weak reports for the first quarter. Guidance for the next few quarters should be soft as well.

Most investors expect to be disappointed by the retailers for the first quarter, so the poor results are already reflected in the stock prices. As a result, retailers' stocks should have limited downside in the near term.

Has anything changed regarding consumer trends? How about trends for retailers?

If anything, consumer trends are worsening. Consumer confidence continues to deteriorate because consumers are feeling pinched. Rising food and gas prices are taking bigger bite out of consumers' wallets. This leaves less to spend on discretionary items such as clothes, golf clubs or big-screen TVs. Meanwhile, consumers are still carrying record levels of debt, and home prices continue to tumble. This leaves many consumers feeling poorer. When the costs of what you need are rising and your biggest asset is declining in value, you end up spending less.

Many retailers have shifted their strategies to match a slower growth environment. These retailers are scaling back new store openings, closing underperforming stores and reducing inventory levels. While there is little retailers can do to overcome macro or industry headwinds, they can cut costs, stockpile cash, and position their stores for an eventually rebound.

To what extent do you feel the government stimulus checks will help out retailers?

The checks are being sent out at the beginning of May, so I expect some retailers to benefit in the second quarter. Unfortunately, I suspect that most people will use their tax rebate checks to pay down credit cards and other debt. Whatever is left will be used to buy gas or groceries. Two retailers that should benefit the most from the tax rebate checks are Wal-Mart (WMT) and Costco (COST).

If these checks were sent out in July (ahead of the back-to-school shopping season) or in November (at the beginning of the holiday shopping season), I could see the retail sector experience a nice boost in sales. May is typically the slow season. Consumers don�t a have reason like the new school year or Christmas gifts to go out to the mall and shop.

Do you have any Buy-rated stocks you'd recommend at this time?

Despite the all the headwinds, I became more constructive on retail stocks at the beginning of March. I upgraded the group from Underperform to Market Perform. Retail stocks declined by so much from August 2007 to February 2008 that most of the negative news was already reflected in the stock prices. As a result, I have been upgrading several stocks in my coverage list. But most of those upgrades are from Sell to Hold.

A few names I like right here are GameStop (GME), the video game retailer. Video games have been largely immune from the consumer spending issues, and 2008 should be another banner year for video game sales. I also like Citi Trends (CTRN), a retailer of value-priced urban apparel. I've liked their long-term growth story for some time, and it should be one of the few apparel retailers that benefits from the tax rebate checks.

Another name is Deckers Outdoor (DECK), the maker of UGG boots. The company recently reported blow-out numbers for the first quarter and upped its guidance for the rest of the year. It appears that no one told Deckers that consumers are struggling.

Are we approaching that time when value-seekers would be well advised to buy retail stocks?

While there are individual names that can be bought here, I think it is too early to get excited about retailers as a whole. The market expects a decent rebound in the second half of the year. If that rebound fails to materialize, several retail stocks could have another leg down. Overall, I am not expecting a big rebound in the second half of the year. I think conditions will stabilize and not get any worse. As such, I prefer to remain neutral on retailers until the housing market shows signs of stabilizing.

Rob Plaza, CFA is a senior analyst covering the retail industry for Zacks Equity Research.

Comments

[Onecent]

DECK didn't report "blow out" numbers, it beat by a penny after estimates were lowered, come on.

And, please, their earnings have been driven in the past by very trendy boots that teens and young women bought as a fashion statement, that has a short shelf life in retail. They are up against Sketchers with weak branding and sales in Tevas this summer.

We are in a discretionary retail consumer slow-down. It's very unlikely DECK is going to get the fall orders it had in the past.

[False Profit]

CTRN is at 20x EPS and their free cash flow has been consistently negative, which calls into question their reported profitability. I don't understand why anyone would buy this stock at the current level. I can't see it worth more than $12.