Retail Sales: Two Reasons for Optimism

The holiday season brings a multitude of things with it, some good and some bad. We get the mother-in-law no one wants to see, crazed Black Friday crowds, and an empty wallet. For retailers, our empty wallet should bring something desirable: profits. Investors hoping the critical month of December would bring in a surge of profits for retail chains could be disappointed and see stock prices drop on sales figures like Family Dollar's  (NYSE: FDO  ) did Thursday. Ken Perkins, President of Retail Metrics, notes that December typically represents one-fifth of total annual sales, making it easy to understand a sell-off if a company doesn't beat expectations. Costco (NASDAQ: COST  ) and Nordstrom (NYSE: JWN  ) led the way with exceptional increases, 9% and 8.6%, respectively, in same-store sales for the five weeks following Thanksgiving. If you find one of your investments reporting dismal December sales, relax: There's reason for optimism.

Reasons for optimism
While you may be initially disappointed in specific company results, I think there are two reasons the numbers may not be as bad as they seem. First, a National Retail Federation survey reported that 81.1% of shoppers planned to buy at least one gift card during the holiday season. Shoppers also said they planned to spend more than ever on gift cards, with an average bill of $156.86. That's the highest amount in the survey's 10-year history, and 22% of consumers' planned holiday spending. This sizable allotment of spending isn't recorded as sales by retailers until the gift cards are redeemed, which typically happens a week or two after Christmas.

Another reason for optimism is that the last week of December was reportedly stronger than expected, and it likely would have been even better if the 24-hour reporting on the fiscal cliff hadn't likely made consumers more hesitant to spend. With the fiscal cliff averted, it's very possible we'll see a little extra boost in spending for January helping offset some December misses. For those reasons, some of these disappointing retail sales might not be as bad as they currently seem. Now let's look at some specific results -- the good, the bad, and the ugly -- and see what it means for investors going forward.

The good
Costco is leading the way for retailers with a same-store sales increase of 9% for the five weeks between Thanksgiving and Dec. 30, 2012. It's also a 12% increase over the same time period last year. This just confirms what we already knew: Costco is doing well and remains a great place to park your investment dollars. Expect Costco to increase its market share over time and continue to post earnings growth. Look at the table below to see consistent growth in Costco's financials.
 

 

2009

2010

2011

2012

Revenue

71,422

77,946

88,915

99,137

Operating income

2,522

2,817

3,224

3,667

Net income

1,086

1,303

1,462

1,709

EPS

2.47

2.92

3.3

3.89

Source: S&P.

Costco wasn't the only bright spot for retailers this holiday season, with Nordstrom also a picture of success. Nordstrom's success, in my opinion, is partially due to the increased confidence of its core, high-income, consumer as the economy gradually improves. Going forward, It plans to continue expansion that will fuel revenue growth. The plan is to nearly double its Rack stores, the off-price division of Nordstrom, from 119 stores to 230 by 2016. Both Costco and Nordstrom did well this holiday season, continuing a trend of success covering the last few years. While I believe both are fairly valued, they still deserve a look for investments because of their potential strong future growth.

The bad
Target
(NYSE: TGT  ) had flat same-store sales compared to 2011, lower than the expected 0.8% increase. It also reported updated guidance that earnings will meet or slightly exceed the low-end estimates for the quarter ending Jan. 31. Competitor Wal-Mart doesn't release monthly sales numbers, but it will be important for us to view its next release to see if it is stealing market share from Target. 

Limited Brands (NYSE: LB  ) saw a same-store sales increase of 3%, which came in below analyst expectations. This is a rare miss for the company, and the market's reaction sent the stock down 5.5% Thursday. I think this provides a chance to scoop up shares at a small discount. Limited Brands has a great opportunity to expand its international business through its Victoria's Secret chain. The company has a strong track record of earnings growth and this trend will likely continue even with a holiday slump.

The ugly
Family Dollar saw its same-store sales rise 2.5% in December, but this paled in comparison to its 6.6% increase in the prior quarter. The market reacted harshly, sending the stock down nearly 12% Thursday. I think that's drastic for a company with a healthy balance sheet and consistent performance.

Bottom line
As investors, it's always important to keep an eye on holiday season results, as they represent a large chunk of annual sales. That said, it is but a month in the grand scheme of things, and while sales may briefly disappoint, the negative market reactions last Thursday seem a bit harsh. This gives savvy investors a chance to scoop up shares in solid, proven companies at a discount. Not one company covered in this article is a bad place for your investments, in my opinion, regardless of whether it recently disappointed or not. If you're savvy enough to pick up shares at a discount, cheers to you, and to a bright 2013 for your portfolio.

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