Retail Stocks: What to Expect

The retailing world’s eyes were pinned to Wal-Mart Stores (WMT), over the Thanksgiving weekend, awaiting for the outcome of the faceoff between the company and unions over what the latter claim are near poverty-level wages and the results of the giant retailer’s massive Black Friday sales offers. But investors may want to spare some time to glance at the top end of the retail spectrum, too, where the big bargains for shoppers may be fewer and further between, but where stores catering to the 1% are waging their own no-less ferocious battle for market share.

SKS Chart

SKS data by YCharts

After outperforming the S&P 500 index for much of the year, companies like Saks (SKS) and Coach (COH) began to lag by summer, as concerns about the health of consumers for their high-end goods from China and Japan combined with ongoing anxiety about the willingness of affluent Europeans to spend as heavily as they had in the early stages of the recovery.

SKS Profit Margin Quarterly Chart

SKS Profit Margin Quarterly data by YCharts

Even Saks now is feeling the pressure to promote its products to continue generating sales; in the third quarter results, reported earlier this month, the company said its gross margin shrank to 43.9% from 44.2%, a weaker-than-expected level, as a result of increased promotions. Saks executives acknowledged that the modest 3.3% gain in same-store sales during the quarter was also a disappointment.

XRT Chart

XRT data by YCharts

Does that mean that you’d be better off buying shares of the retailers catering to the middle class or working class, of the kind in popular the SPDR S&P Retail ETF (XRT)? Probably not. They are facing the same kind of downward pressure on their profit margins that are starting to afflict the likes of Saks, and they have been on an upswing until recently. Odds are that investors will start selling into any rally in the stocks of these retailers off initial reports of solid Black Friday sales, especially in the absence of any agreement on the ‘fiscal cliff’ that might erode consumer spending power early in the new year.

AEO PE Ratio TTM Chart

AEO PE Ratio TTM data by YCharts

There are retailers, like Gap Stores (GPS) and American Eagle Outfitters (AEO) whose brands right now seem strong enough to help them withstand some of the competitive pricing pressures, but these stocks have seen a rise in valuation this year and currently trade at or near their recent highs in terms or PE ratios. Outside of the stores themselves, the retailers seem to offer investors few bargains, and even betting that the 1% will remain heavy spenders may not be as reliable a gamble as it has been.

Suzanne McGee is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.

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