Rotation Out of Retail Stocks Near-Term

Sector Rotation

Individual retailers reported chain store sales results Thursday for December, and the mixed bag of data decidedly disappointed the market. Even as December disappoints, the full holiday shopping period proved positive. Still, stocks had priced in those early gains as they came, and the old adage now begs to question, "What have you done for me lately?" Thus, baring a magnificent Employment Situation Report, I expect a near-term rotation out of retail sector stocks.

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Rotation Out of Retail Stocks Near-Term

The general sales tally for stores open a year or more fell short of economists' and analysts' views for December. Retail Metrics Inc. reported sales increased 3.2% in aggregate in December, against a 3.5% expectation. Retail sector shares had gained over recent months on favorable reports leading up to today, but a late season fizzle is taking some steam out of them now. The SPDR S&P Retail ETF (NYSE: XRT) dropped off 1.4% today on the news, but is still up near 9% since the close of October.

Seeking answers, the pull-forward theme is garnering most of the darts. After all, Retail Metrics notes November sales had increased a sturdy 5.5%, and MasterCard Advisors SpendingPulse (NYSE: MA) indicated that the full holiday season saw 5.5% growth as well. That was the best reported gain in five years time. Maybe this year, folks spent some money in November and regretted it afterwards, keeping them inside for snowy December.

As for the blizzard, Goldman Sachs' (NYSE: GS) Senior Retail Analyst Adrianne Shapira reminded us that there was a snow storm on Super Saturday in 2009, and one on the day after Christmas this past year. Net, net, she says, it's always going to snow in the Northeast during the holiday shopping season, so that effect is a wash. These types of anomalies are going to be especially meaningless as we look at periods covering more than a month.

Prices generally got squeezed this year on sales to lure in early shoppers, as retailers smartly sought to steal some market share. At the same time, breakthrough, technologically advanced goods got a whole lot cheaper this year, as I can attest, with my Toshiba Satellite (OTC: TOSBF.PK) going for about $300 less than it went for as recently as May! High-definition big screen TVs, electronic book readers, netbooks and i-everythings priced lower, and so Best Buy (NYSE: BBY) and other retailers of electronics faced a tough challenge and missed. 3D technology apparently flopped as a pull, and I suspect will not be successful until you can watch it without the special glasses. BBY shares fell 1.3% Thursday as a result. Several discounters who deal in electronics, among other goods, also blamed the segment today on weak same-store sales. That list included Target (NYSE: TGT), as its shares were off 6.8% on a soft 0.9% December same-store sales gain.

Results were mixed in this fickle marketplace, and so it is a stock-picker's dream arena today. The apparel, department store, discount and teen retailers that did relatively well included Abercrombie & Fitch (NYSE: ANF) +15%; Zumiez (Nasdaq: ZUMZ) +9.2%; Nordstrom (NYSE: JWN) +8.4%; Saks (NYSE: SKS) +11.8%; The Buckle (NYSE: BKE) +6.1%; TJX Cos. (NYSE: TJX) +6.0%; Costco (Nasdaq: COST) +6.0%; Dillard's (NYSE: DDS) +7.0%; BJ Wholesale Club (NYSE: BJ) +3.8%; Ross Stores (Nasdaq: ROST) +4%; J.C. Penney (NYSE: JCP) +3.7%; Kohl's (NYSE: KSS) +3.9%; Macy's (NYSE: M) +3.9%; and Walgreen (NYSE: WAG) +2.8%. While the stores posted sales gains, some were short of expectations, like Macy's, with M shares falling 4% as a result. That said, if you compare November through December periods, sales were solid at Macy's.

December's relative losers on the sales front included:

American Eagle Outfitters (NYSE: AEO) -11%
Aeropostale (NYSE: ARO) -5%
The Gap (NYSE: GPS) -3%
Wet Seal (Nasdaq: WTSLA) -2.1%
Stein Mart (Nasdaq: SMRT) -1.9%
Hot Topic (Nasdaq: HOTT) -1.7%
Cato Corp. (Nasdaq: CATO) 0.0%
Bon-Ton Stores (Nasdaq: BONT) +0.1%
Fred's (Nasdaq: FRED) +0.2%
Rite Aid (NYSE: RAD) +0.6%
Destination Maternity (Nasdaq: DEST) +1.2%
Stage Stores (NYSE: SSI) +1.9%

Retail sales are expected to increase somewhere between 3-4% in 2011. Still, I expect capital to continue a sector rotation out of retail generally in the near-term, perhaps leaving a pool fit for stock-pickers alone. While it's harder to say where capital will go, it's easier to see it should come out of retail for now, with gasoline prices expected to rise and with unemployment still high. We may begin to see a dent taken out of unemployment in the coming quarter (perhaps even Friday - a factor that could stop rotation), but other threats stand poised against broad and sustained economic recovery. Those include inflation in waiting, a likely war in the Middle East, and fiat currency dilution spiked with a shot of civil unrest in Europe, Russia, and even China and beyond.



Article interests investors in: S&P Retail ETF (NYSE: XRT), Wal-Mart (NYSE: WMT), Pier 1 Imports (NYSE: PIR), Ethan Allen (NYSE: ETH), Hooker Furniture (Nasdaq: HOFT), Home Depot (NYSE: HD), Lowes (NYSE: LOW), Apple (Nasdaq: AAPL), Best Buy (NYSE: BBY), The Limited (NYSE: LTD), Chicos (NYSE: CHS), Ann Taylor (NYSE: ANN), The Gap (NYSE: GPS), Macy’s (NYSE: M), JC Penney (NYSE: JCP), Nordstrom (NYSE: JWN), TJX Company (NYSE: TJX), Kohls (NYSE: KSS), Costco (Nasdaq: COST), Target (NYSE: TGT), Wet Seal (Nasdaq: WTSLA), Hot Topic (Nasdaq: HOTT), American Eagle Outfitters (NYSE: AEO), Aeropostale (NYSE: ARO), Abercrombie & Fitch (NYSE: ANF), Saks (NYSE: SAK), Tiffany (NYSE: TIF), Talbots (NYSE: TLB), Lumber Liquidators (NYSE: LL), Builders Firstsource (Nasdaq: BLDR), Fortune Brands (NYSE: FO), Leggett & Platt (NYSE: LEG), Tempur-Pedic International (NYSE: TPX), Acuity Brands (NYSE: AYI), La-Z-Boy (NYSE: LZB), Select Comfort (Nasdaq: SCSS), Sleepy’s (NYSE: ZZ), Furniture Brands (NYSE: FBN), Natuzzi (NYSE: NTZ), Sears (Nasdaq: SHLD), Dillard’s (NYSE: DDS), Bon-Ton (Nasdaq: BONT), Cost Plus (Nasdaq: CPWM), Baker’s Footwear (Nasdaq: BKRS.OB), Bebe Stores (Nasdaq: BEBE), The Buckle (NYSE: BKE), Cache (Nasdaq: CACH), Casual Male (Nasdaq: CMRG), Cato (Nasdaq: CATO), Christopher & Banks (NYSE: CBK), Citi Trends (Nasdaq: CTRN), Collective Brands (NYSE: PSS), Destination Maternity (Nasdaq: DEST), Dress Barn (Nasdaq: DBRN), DSW (NYSE: DSW), Finish Line (Nasdaq: FINL), Footlocker (NYSE: FL), Gymboree (Nasdaq: GYMB), Guess (NYSE: GES), J. Crew (NYSE: JCG), Jones New York (NYSE: JNY), Jos. A Banks (Nasdaq: JOSB), New York & Co. (NYSE: NWY), Men’s Wearhouse (NYSE: MW), Syms (Nasdaq: SYMS), The Children’s Place (Nasdaq: PLCE), Bank of America (NYSE: BAC), Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), J.P. Morgan (NYSE: JPM), Citigroup (NYSE: C) and Wells Fargo (NYSE: WFC).

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