Successful Investing

by Andrew Leckey

       Attention, shoppers and investors: In retailing, 2003 is a year to be hip.
       Urban Outfitters (URBN) shares are up 193 percent, Chico's (CHS) 80 percent, Hot Topic (HOTT) 68 percent and Pacific Sunwear (PSUN) 64 percent this year.
       If you have no particular reason to set foot in one of those trendy, youth-oriented retailers, their outstanding returns may come as a big surprise.
       However, the general upward movement of stocks of retailing stocks, dramatized by a 52 percent rise in the Standard & Poor's Retail Composite since spring, shouldn't surprise you if you're an optimist who believes the U.S. economy is on the mend.
       Success has not been across the board, as the harsh economic realities of unemployment and wavering consumer sentiment continues to dog the industry. In some cases, invasions by stronger competitors taking advantage of the turmoil are to blame.
       For example, FAO Inc., the parent of upscale toy retailer FAO Schwarz, has a severe cash crunch that means it may need to seek a buyer for the company. It filed for bankruptcy protection and then emerged from it this year, but even with its prestigious name it has still been unable to compete with discount chains.
       Leaving nothing to chance, many of the nation's retailers have been pushing their merchandise out sooner and more forcefully than ever. In an attempt to be smarter this year, promotions are more targeted and based on consumer data carefully compiled all year long.
       The most successful firms also usually have a well-crafted, effective online sales site to help expand their holiday sales, helped by the fact many weaker competitors dropped off the Internet altogether. Total online retail sales are projected to hit $95.6 billion this year, compared to $75.7 billion last year, according to a survey by Forrester Research.
       "In every 'hoped-for' economic recovery, economists and strategists pound the drum for the purchase of early-cycle stocks such as the retail group," noted Don Trott, retailing analyst with Jefferies & Co. in New York, "However, the good news is that there really is better inventory management this year and promotional activity is more sensible."
       A holiday sales increase of 4.5 percent, more than double last year's increase, is predicted by Trott. He points to consumer electronics, high definition video, laptop computers and digital cameras as driving forces this Christmas.
       The stock of consumer electronics and computer chain Circuit City Stores Inc. (CC) is therefore one of his favorites. He also recommends the off-price retailing company TJX Companies Inc. (TJX), the family-oriented retailer Kohl's Corp. (KSS) and the home improvement chain Lowe's Companies Inc. (LOW).
       "Our initial expectations for the holiday season have been strong, with the likelihood that we're in a rising-tide environment," said Adrienne Tennant, retailing analyst with Wedbush Morgan Securities in Los Angeles. "You still have a bargain-conscious shopper out there and retailers have been offering incentives for people to shop earlier."
       She's not so sure that recent big winners Urban Outfitters, Chico's, Hot Topic and Pacific Sunwear can move much higher for a while, though she admires their longer-term fundamentals. She prefers strong retailing names with solid prospects whose shares have yet to run up in price.
       Women's apparel retailers AnnTaylor Stores Corp. (ANN) and Bebe Stores Inc. (BEBE) are both recommended by Tennant. She also likes the prospects of the casual apparel company American Eagle Outfitters Inc. (AEOS).
       "I expect sales this holiday season in the 5 to 6 percent range, which is pretty healthy," said Derek Leckow, retailing analyst with Barrington Research Associates in Chicago. "Low interest rates stimulated the use of home equity loans for home improvement projects and durable goods last year, but I expect to see an increase in soft goods such as apparel this year."
       The stocks of drugstore chains CVS Corp. (CVS) and Walgreen Co. (WAG), as well as book, music and movie superstore Borders Group Inc. (BGP) are recommended by Leckow. Drugstore chains have been rapidly expanding not only their number of stores, but the merchandise that they sell, making them an increasingly important factor in overall holiday sales.
       "An improving economy is always a good thing for retailers, though this recovery still hasn't generated a lot of new jobs," observed Jeff Stinson, retailing analyst with Midwest Research in Cleveland who covers discount chains and department stores. "I expect that you're going to see good results primarily at the discounters and at the higher-end stores."
       Stinson expects a 3 to 4 percent increase in 2003 holiday sales. Although he didn't wish to give stock recommendations, he predicted that sales at retailers such as Wal-Mart Stores, Target Stores, Nordstrom Inc., Federated Department Stores and May Department stores should be particularly strong.
       There can be significant variations in holiday sales from year to year that reflect the economic conditions.
       High points in holiday sales over the past decade were the 8.4 percent increase in 1994 and 8.2 percent gain in 1999, according to the National Retail Federation (www.nrf.com). The weakest results were a 2.7 percent increase in 1995 and the 2.2 percent rise in 2002. Last year's weak figure should help make this year's comparison a more favorable one, the analysts concluded.
       Editor's Note: Andrew Leckey's column, "Successful Investing" appears regularly in The Bull & Bear Financial Report.