09/05/2012
Prepare to do exactly what mother always forbids. Take a peek at what’s coming for Christmas.
A prime way to accomplish this: Look at the trends reflected in back-to-school shopping. It’s the second largest shopping time of the year, behind only the frenzy seen during Christmas. Businesses prospering in August will likely see full stores again a few months from now, when thoughts are as much on little Johnny’s stocking as the departure time of his school bus.
Sure enough, Deutsche Bank analyst Charles Grom found that, in the last decade, the tenor of the consumer portrayed in August and September sales reports shows up again in holiday shopping a whopping 80% of the time. Some clarification, Grom gathered this data point by reviewing figures from his coverage universe. Fortunately, the group is a collection of bellwether retailers, like Wal-Mart and Target, that often neatly underscore consumer sentiment.
So far, August was a positive time for nearly all. Sales at established retail locations rose 3.6% last month, surpassing estimates of 2%. But, as in past months, the greatest gains came for discount and luxury stores. Why? Businesses focused on markdowns and value attract the budget-conscious middle class. Meantime, wealthy shoppers haven’t cut back as much during the recent economic slide.
It is a bit much to hope consumers have completely recovered, though, says Ron Friedman, a Marcum retail consultant. “I’m cautious about the holiday season, I think it’ll be OK…but I don’t think it will be anything to write home about,” he says. The latest number from the Consumer Confidence Index echoes Friedman’s fears. The index last month hit a nine-year month low.
Clouding Friedman’s forecast further: the election. It’s too close to know who will win, and that, he says, leaves a large unknown awaiting consumers.
As for which specific stocks could see a bright and merry time, Steven Roge, who leads the Roge Partners Fund, believes Coach, the luxury leather, can leave recent troubles behind. He sees the stock’s valuation as a substantial plus. After a large sell-off, shares today go for a low $57. Analysts expect Coach to earn $3.85 a share in its fiscal 2013 and $4.43 a share the year after. That means Coach fetches 14.9 times and 13 times estimates, respectively. “We think the market is handing us an opportunity to buy a flagship brand at a discounted rate,” says Roge.
A strong balance sheet also supports the case for owning Coach. The company ended its latest fiscal year, in June, with nearly $1 billion in cash, a four-year high. Debt remains a none-issue. And Roge expects Coach to grow free cash flow past last year’s record level—more than $1 billion—at 12% to 15% annually.
Not everyone can shop at Coach, though. Most Americans are focused on making their dollars last. It makes sense to invest in businesses helping them do just that. This is why Chase Investment Counsel’s Edward Painvin favors Target. The discount big-box retailer’s Red Card program, a store credit card that takes 5% off a bill, is growing in popularity. Target management, in fact, recently raised its outlook and issued a new goal: It aims to have 30% of all customers using the card.
Target could see a number of easy year-over-year comparisons in 2013, after incurring costs related to an expansion into Canada this year. What’s more, the stock sells at a reasonable 14.6 times expectations for this year’s earnings. “And if you look at 2013, it becomes even more attractive,” says Painvin, manager of the Chase Growth fund. Target goes for 13.1 next year’s earnings.
For sure, Target customers are a loyal bunch. At the core, a group of middle-tier folks, making about $100,000 a year, who routinely flood the store. Target sees 50% of sales come from 10% of customers, UBS estimates. This established loyalty helps to fortify Target’s competitive advantage.
Allocate some cash toward the competitors best positioned to lure away Target’s customers, Painvin suggests. This includes Ross Stores and T.J. Maxx. Both now offer products better attune to the general public, Painvin says, lowering the risk of needing promotions to clear too much inventory. “It makes their whole offering more relevant. These guys have executed very well, and the price points are very attractive.”
Not everyone will use cash to pay for purchases this fall, nor this winter, certainly. The Frank Value Fund’s Brian Frank is attracted to credit companies like American Express, as well as eBay, the operator of PayPal. While consumers have cut back on credit-card debt recently, a bid to shelter themselves from the economic uncertainty, it’s likely to pick back up once Americans feel more comfortable spending.
Plus, buying American Express and eBay offers a way to catch retail trends but avoids companies with stores to manage and substantial overhead. And if there’s inflation, credit-card companies have proven resilient at raising prices. “They can weather a money-printing storm,” Frank says, which we think might be on the horizon.” He adds, “There’s less cash in the world everyday, and more people are using mobile phones, credit cards, debit cards.”
Keep your eye on where proud parents shopped for Susie’s pencils and Tommy’s new sneakers. Soon enough, they’ll be thinking more about Santa than the school-day.
