The Best Way to Profit From the Holiday Shopping Frenzy

By The Fiscal Times  NOV 26, 2012 4:40 PM

Keep an eye open for those retailers that might be immune to price matching, either because they are offering something that their rivals can't readily replicate or because they are a brand that really commands loyalty.


Black Friday is history. Now it’s time to welcome Cyber Monday, another day of frenzied shopping and large-scale dealmaking and attempts by retailers to coax every last dollar out of your wallet. Online sales could exceed $1.5 billion today, according to comScore Inc.
But while shoppers spent an estimated $423 apiece from the early openings on Thanksgiving Day itself through to the end of the day Sunday, up 6% from last year’s levels according to a survey conducted for the National Retail Federation, investors should be cautious before they add retail stocks to their portfolios, other than on a very selective basis.

Trends that are great for consumers can turn out to be less than lucrative for retailers. True, Wal-Mart (NYSE:WMT) faced down union protests and offered deals that must have tempted even those who recoil at anecdotes of workers trying to live off wages that hover just above poverty level. And Wal-Mart’s stock jumped on Friday in response to reports that sales traffic was higher than it was in 2011. But the shares have given back most of that gain today, and what remains to be seen is how those discounts affected the retailer’s bottom line.

That’s one of the concerns that lingers over the retailing sector in general. With more than half of this year’s Black Friday shoppers reporting venturing online as part of their strategy, and comScore reporting that online sales on the day topped $1 billion for the first time ever, merchants already had pledged to meet discounted prices offered by Amazon and other online vendors in order to hang on to market share and sales volume.

But offering big loss leaders can be tricky. It’s less difficult for an online vendor like Amazon to keep shoppers glued to their screens as new deals roll out every 20 or 30 minutes than it is for a Wal-Mart or Target (NYSE:TGT) to convince exhausted shoppers to stick around for the next hour’s deals rather than just head home to nosh on turkey sandwiches – or check out a rival’s deals instead.

The key to coaxing shoppers out of their homes on Thanksgiving and keeping them in the stores were big discounts. If razor-thin margins are the price that retailers have to pay for sales and foot traffic, the question becomes how big a sacrifice they are willing to make. Best Buy (NYSE:BBY) is the poster child for this problem, having fought (largely in vain) the phenomenon of “showrooming” for some years now. The rationale behind these deep cuts, as execs at Best Buy and other retailers say, is to earn customer loyalty. But it’s hard to see how much loyalty customers have to any specific vendor when they choose to buy a camera at one store rather than another because the price is $3 cheaper.

There also is the broader question of the economy and – yes – the fiscal cliff. Just because the retail season got off to a great start doesn’t mean that this can be sustained over the next four or five weeks. Most shoppers have finite resources, and their willingness to keep spending will be shaped by how confident they are that their paychecks next year – when the credit card bills arrive – will be large enough for them to meet those payments. If they are worried about the security of their jobs or that higher taxes will eat into their disposable income, odds are they’ll stop spending when they hit that limit. It’s not a question of how much they spend on the opening weekend of the holiday shopping season, but of how much they are willing to spend between now and the new year. And there is a reasonable chance that those massive discounts offered over Thanksgiving may have tilted the spending in favor of the early part of the season and that the final weeks may see much more sluggish sales levels – or retailers feeling forced to offer just as hefty deals or even more alluring discounts to keep the volumes up.

The bottom line is all about the bottom line. The National Retail Federation’s survey-based calculation that shoppers spent $59.1 billion over the holiday weekend is certainly impressive. But what did retailers have to do in order to accomplish that? Is it profitable, and can it be sustained?

The renewed fuss over Wal-Mart’s labor practices and low wages have reminded shoppers that somewhere along the line, someone pays some kind of a price for a big bargain. Few retailers are as aggressive as Wal-Mart on both prices to consumers and wages, but the fact remains that if a hyper-competitive retail market means margins come under pressure, it is hard to see how many of these retailers will emerge as attractive investments.

So as the sales offers keep hitting the circulars or landing in your e-mail inbox, and as the data keep making headlines, you may want to keep an eye open for those retailers that might be immune to this kind of price matching, whether because they are offering something that their rivals can’t readily replicate or where a brand really commands loyalty.

Elizabeth Arden (NASDAQ:RDEN) is a publicly-traded cosmetics company whose products would be an example of this: While shoppers may buy special offers, those who already have chosen to use Arden cosmetics, perfumes or other products aren’t likely going to be tempted to switch brands simply because they are offered a $5 bargain. Similarly, a teenager convinced that certain brands of jeans or athletic shoes are “must owns” isn’t going to be satisfied with a discount on an alternative. And then there are products that have intellectual property behind them, like Activision’s (NASDAQ:ATVI) Call of Duty game series, a perennial hot seller during the holiday shopping season.

When you spot a retailer that is somehow managing to get the trends right, that has proven able to manage its inventories and profit margins appropriately, and that controls its own distribution, well, that’s fine, too. Gap Stores (NYSE:GPS), though its stock is less of a bargain than it was a year ago at this time, has the ability to offer merchandise directly to consumers via its own stores. Yes, shoppers can snap up colored corduroy pants elsewhere – but not Gap brand ones, and Gap has found a way to make that brand an asset once more, at least for the time being. But when you’re hunting for bargains in the stock market, you’ll likely be better off bypassing the retailers altogether and looking for the hot products and brands.

Editor's Note: This article by Suzanne McGee originally appeared on The Fiscal Times.

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No positions in stocks mentioned.