Is This a Good Time for Retail Stocks?

In mid-September, government data showed that higher energy costs contributed to higher consumer prices in August, crippling already cash-strapped shoppers. Despite the fact that the recession apparently ended in late 2009, slow growth in the job market has tamed the excitement of average investors, making it hard to predict a big boom in retail stocks.

However, it's interesting to note that the SPDR S&P Retail ETF is up about 18% so far in 2010, far outpacing the minor gains in the general market. And this is notwithstanding high unemployment, rising prices for raw materials, and a sluggish pickup in income growth.

Typically, this time of the year is a great time for retail stocks. Back-to-school sales send flocks of children and their parents to malls and outlets, and before we know it, the holiday shopping season is in full effect. This is the time to shine as retailers have to manage gobs of inventory, tout new and improved items, while maintaining and attempting to improve their brand image. The fall and winter season has the ability to separate the good from the bad, and often times, the very bad.

Augusts retail comp and same-store sales numbers were pretty mixed throughout the industry, although as a whole they came in above analyst estimates. I have a feeling that although consumer sentiment is generally pretty pessimistic, retailers will still manage to surge this season.

In order to find some of the best deals out there, I ran a screen to help single out the best deals available. The companies below all have been able to average revenue and earnings growth over the past five years (no easy feat); in addition, I've included their P/E ratios to illustrate where the best value may be. Below are the results:

Sources: Capital IQ, a division of Standard & Poor's; Yahoo! Finance.

However, only a few of these companies have been able to overly impress this year, during the toughest of times. Urban Outfitters and Cabela's both beat analyst estimates last quarter, but Buckle and Dress Barn fell below expectations, while Aeropostale and Target delivered exactly the results investors were anticipating.

It's definitely not an easy environment, especially with Internet retailers like Amazon grabbing such an increasingly large piece of the pie. The CEO of Urban Outfitters confirmed this sentiment recently, when he said "We do not benchmark ourselves against legacy brick-and-mortar retailers. We are benchmarking against e-tailers."

This certainly isn't a list of stocks to buy; more so it's a great place to start some of your retail research. My foolish colleague Alyce Lomax recently penned an article telling you which retail stocks are hot and which are not, so be sure to check it out.