The early numbers for holiday retail sales -- real numbers, not forecasts -- are coming out now, and they are coming in better than expected. But keep in mind that the bar has been set pretty low after four years of recessionary shopping.
Thanks to a last-minute push during Christmas week that sent sales up 4.5% over the same time last year, the International Council of Shopping Centers is expecting December sales will be 3.5% to 4% above 2010's. That's good news for investors looking at the retail sector, and may indicate there really is a "new normal."
That's where things get interesting for mass merchants. They have all the main trends in their favor -- unemployment is down below 9% and consumer confidence is up, according to the latest Conference Board numbers. But retailers are still struggling with rising costs and tight-fisted consumers squeezing their margins. This has been the takeaway from 2011, and will likely be the same for 2012.
The luxury consumer is back, no questions asked. But catering to the 99% -- even with their declining wages -- is the consumer segment, where many big-boxes make their money. Unfortunately, those consumers are not shopping like they did before the recession. Those shoppers are limiting themselves to necessities, shopping around, and holding out for sales like they did during the downturn. In a Deloitte holiday shopper survey, 86% said they are more precise in what they buy and 80% said they are more efficient in getting in and out of stores than they were a year ago.
Just before the last holiday-shopping rush, Thomson Reuters analyzed results and forecasts for a whole slate of retailers and concluded that luxury retail is the segment to be in as the year winds down. This segment has had an easier time maintaining pricing power, while other stores have had to rely on discounts, and therefore squeezed margins. The recession has retrained many shoppers to look for an even better deal. To meet this demand, many retailers have to rely on discounts to lure shoppers, so even growing sales won't necessarily guarantee higher profits.
Even Wal-Mart gets marked down
Among the lesser lights of mass retail, enough has been written on the troubles of Sears Holdings
Among mid-price department stores, J.C. Penney and Kohl's
But Target, Penney, and Kohl's have all struggled over the last two years with rising costs -- of labor in China, and of cotton and other materials worldwide -- and with trying to pass them on to consumers in the form of higher prices. Shoppers have pushed back. Even with cotton prices abating, many of these difficulties are likely to persist for retailers through next year.
Investors without strong stomachs should stick to the luxury names for now, such as Nordstrom and Saks, two companies that have taken the downturn's lessons and applied them to merchandising and operations. They have used the last three years to figure out how to stock just enough items to avoid relying on big sales later, how to combine selling products online and on the floor, and how to work technology into their operations to keep costs down. Both are trading closer to their 52-week lows than their highs, and could have a lot of upside from here.
There are likely no explosive growth stories in domestic retail for next year. Investors who want to be in this sector will have to have patience -- and sometimes maybe even a strong drink. But Wall Street analysts expect Macy's full-year earnings will be higher than last year's, and there is talk of a share repurchase.
A tough time for domestic retailers doesn't mean there aren't huge opportunities in this space, though. The Motley Fool has uncovered one explosive growth story in broad-line retail in one of the hottest emerging markets. We are so excited about this stock that we've dubbed it "The Motley Fool's Top Stock for 2012." You can access the special free report outlining this stock by clicking here. The report is free today, but it won't be forever.
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Fool contributor Mercedes Cardona doesn't own any of the stocks mentioned in this article. She'd rather invest in shoes. Follow her on Twitter. 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.