There is no group that is more disjointed and lacking a strong upward trend than retail. Just when you think the sector is going to fully tank, a Home Depot or Tiffany comes along and shows stellar numbers. When it appears consumer spending may be turning around, we see Abercrombie & Fitch or Guess lay an egg.
Retail is tough … but not impossible. Pathetic revenue numbers have been blamed on the drop in consumer spending, yet auto sales are peaking, Home Depot is selling big ticket items at a brisk pace, and Signet Jewelers sold high-end merchandise at a rapid clip during this last quarter.
Meanwhile, positive results are incredibly uneven. Williams-Sonoma followed up a stellar earning report in May with a wretched one in August, bringing the stock back down to Earth. Will the same thing happen to Restoration Hardware this week after a stunning report in June? Trying to game any stock around earnings is difficult, but when we’re talking retail, it is nearly impossible to get it right consistently. Just when you think a stock will take a nosedive, the company has a blowout quarter and squashes your dreams of a big payday on the downside.
As you can clearly see in the above examples, for some of these retailers it’s a crap shoot, but for others, there are some important trends taking hold. Hence, we’re doing a little retail analysis today.
We all know that there is a high correlation between spending and economic/job growth and that wealth creation has a trickle down effect on the economy, especially retail. Consumers who are not affected that much by a downturn are likely to continue purchasing goods. Looking towards the holidays, it appears that high-end retail is where the action will be – even going into early 2015. Many of the trends in this retail group are positive and showing growth momentum, which can be sustained by stronger buying power and price increases that stick.
Automakers continue to roll along and sell vehicles. Carmax and AutoNation have been talking about pent up demand for months, and they have been posting record numbers lately. China is also flying under the radar, even though they still have a strong economy and an insatiable appetite for high-end goods that retailers are eagerly meeting.
Some of the names in this high-end segment include Apple, GoPro, Deckers, Ralph Lauren, Nike, Tiffany, Steven Madden and Vanity Fair. For the most part, their products boast strong and growing margins that may be immune to holidays mark-downs. In other words, consumers will buy their products regardless of discounts on similar products.
Other names that should hold up well during the holidays include Costco, Home Depot, Nordstrom and Macy’s. One retailer that nobody seems to give credit for making a profit is Amazon. Certainly the numbers do not lie, but Amazon has such a large reach that they are going to be a key driver for online holiday shopping. As Amazon goes, so goes the holiday season.
It is no coincidence that many of the aforementioned companies have charts that are flashing buy signals. This holiday season, we are likely to see the biggest and best start to shine the brightest. Don’t miss your opportunity.