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Which Retailers Are Poised to Beat


No one's shopping, but that won't stop some companies.

Feel like shelling out greenbacks at the mall this holiday season?

Neither do your neighbors.

This morning, the National Retail Federation forecasted a 1% decline in total sales to $437.6 billion for November and December. Should this happen, it will mark the first time on record that retail sales would fall for two consecutive years during the holiday season.

Grim stuff. The response of investors: Let's party.

Stock pickers pushed hard today into the SPDR S&P Retail (XRT), an exchange-traded fund with holdings including Carmax (KMX), Expedia (EXPE), Netflix (NFLX), Nordstrom (JWN), and Whole Foods (WFMI).

The ETF was up more than 2% in midday trading. In fact, the XRT is now up 42% in the last six months.

What gives? We checked in quickly with Art Hogan, chief market analyst at Jefferies, for his two cents.

First, it's important to note that Hogan isn't as bearish on the consumer as many of his Wall Street brethren.

"If you look at July, August, and September, this is the first time we have seen an increase in mall traffic in at least a year," he tells us. "I think that there is some confusion as to what the consumer looks like, but I believe that the consumer is better off than many expect."

But what about that lousy labor market?

The latest jobs survey showed unemployment ticking up to 9.8% in September and companies cutting 263,000 jobs. The U-6 rate, which includes marginally attached workers plus those working part-time for economic reasons, jumped to 17%. That's a high for the series going back to 1994.

"Investors have effectively, over the last six to 12 months, factored in that we will see unemployment in the double digits," Hogan says. "That is understood. It is a concern, but is that priced into some of these retail stores that have cut inventory, gotten right-sized, and are actually selling products?"

Hogan adds, "There can often be an overreaction by investors, especially on the discretionary side."

As we head now into the third-quarter earnings season, the market analyst thinks we're poised for some upside surprises from the retailers.

Companies that he thinks could beat expectations: Kohl's (KSS), Target (TGT), Gap (GPS), TJX (TJX), and Aeropostale (ARO).

Broadly, analysts expect consumer discretionary companies to show a combined 17% climb in third-quarter profits versus the year-ago period, according to Thomson Reuters.

Ed Yardeni of Yardeni Research agrees with Hogan that the sector might show some significant positive earnings surprises.

"This won't be attributable to better-than-expected sales," he writes in a client note. "Rather, most retailers have scrambled to slash their labor costs as their sales weakened during the recession."

The investment strategist points out that, during September, employment at retail stores (excluding auto dealerships) was down 3.2% year-over-year. Leisure and entertainment establishments (which include restaurants and hotels) pared their payrolls by 2% year-over-year last month.

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