Holiday Hangover: Retail Companies Face Prospect of Record Returns

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Record sales mean record returns, which is exactly why retailers are cautioned not to count their chickens before they hatch.

Reuters reports UPS expects to handle more than 550,000 returns on Tuesday, the first business day after the New Year, a record 8% increase from the year earlier. They expect to continue handling a daily volume around half a million parcels throughout the week.

Returns mean greater inventories and thinner profit margins. "And with [the returns] goes away the myth that U.S. consumers had found some mysterious and mystical money growing tree," writes Tyler Durden of Zerohedge. Indeed, it could also instigate forecast adjustments for retailers who have been increasingly optimistic about consumer spending.

Online retailers experienced a surge of business this year, up 15% between November 1 and December 26 from a year earlier. They will naturally be the largest recipients of UPS's return parcels.

The good news, according to Ken Burkeen, marketing director of the retail and consumer products division at UPS, is returns are expected to rise 7.7%, "meaning returns as a percentage of total sales have actually dipped despite more customer-friendly return policies."

The bad news is that returns are costly.

"It's expensive for retailers to take back products they have already sold, check they are still in good condition, repackage them and integrate them back into inventory for resale," reports Reuters. The products often end up in the discount bin, and retailers end up taking an even greater hit to their gross margins.

Business section: Investing ideas
Media commentators may be gloomy on the outlook for retail stocks, but we've found plenty of industry executives that appear to be very optimistic on the outlook of their employers.

To illustrate this idea, we collected data on insider transactions, and identified a list of retailing stocks that have seen significant insider buying over the last six months.

Theoretically, insiders know more about their companies than anyone else. So if they're using their own cash to buy the shares of their employers, you better pay close attention.

Insider executives are optimistic on the outlook of these companies -- do you agree? (Click here to access free, interactive tools to analyze these ideas.)

1. Carter's: Designs, sources, and markets branded children's wear. Over the last six months, insiders were net buyers of 1,763,600 shares, which represents about 3.57% of the company's 49.38M share float.

2. American Eagle Outfitters (NYSE: AEO  ) : Operates as an apparel and accessories retailer in the United States and Canada. Over the last six months, insiders were net buyers of 579,634 shares, which represents about 0.35% of the company's 166.69M share float.

3. Collective Brands: Engages in the wholesale and retail of footwear and related accessories worldwide. Over the last six months, insiders were net buyers of 20,139 shares, which represents about 0.04% of the company's 55.24M share float.

4. Hot Topic (Nasdaq: HOTT  ) : Operates as a mall- and Web-based specialty retailer in the United States. Over the last six months, insiders were net buyers of 40,000 shares, which represents about 0.11% of the company's 38.00M share float.

5. Charming Shoppes: Operates as a specialty apparel retailer primarily for women in the United States. Over the last six months, insiders were net buyers of 35,000 shares, which represents about 0.04% of the company's 94.57M share float.

6. Pacific Sunwear of California (Nasdaq: PSUN  ) : Operates as a retailer rooted in the action sports, fashion, and music influences of the California lifestyle. Over the last six months, insiders were net buyers of 10,327,071 shares, which represents about 28.29% of the company's 36.51M share float.

7. Saks: Operates fashion retail stores in the United States. Over the last six months, insiders were net buyers of 4,696,280 shares, which represents about 4.62% of the company's 101.62M share float.

8. Biglari Holdings (NYSE: BH  ) : Engages in the ownership, development, operation, and franchising of restaurants in the United States. Over the last six months, insiders were net buyers of 1,039 shares, which represents about 0.1% of the company's 1.04M share float.

9. Red Robin Gourmet Burgers: Develops, operates, and franchises casual-dining restaurants in the United States and Canada. Over the last six months, insiders were net buyers of 34,704 shares, which represents about 0.29% of the company's 11.95M share float.

10. Luby's (NYSE: LUB  ) : Engages in the ownership and operation of restaurants in the United States. Over the last six months, insiders were net buyers of 156,612 shares, which represents about 0.97% of the company's 16.11M share float.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.

List compiled by Eben Esterhuizen, CFA. Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Insider data sourced from Yahoo! Finance

The Motley Fool owns shares of Biglari Holdings, United Parcel Service, and Red Robin Gourmet Burgers. Motley Fool newsletter services have recommended writing covered calls in Red Robin Gourmet Burgers. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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