Wal-Mart, Teens Could be 2008's Best Retail Bet

By Reuters -  |  Posted 2008-01-14 Print this article Print

Aside from Wal-Mart, analysts expect some companies to prosper this year in spite of the economy, including teen retailers and possibly some beaten-down home improvement stores.

CHICAGO (Reuters) - Consumers and investors will likely be shopping for discounts this year, whether it's in stores or on the stock market, as the sluggish economy hurts sales and profits.

While that means discount giant Wal-Mart Stores could do well this year, it also could cheer other retailers who have seen their stocks sold off since New Year's Day and now look like bargains, even in a U.S. economy some say is either heading into or already in recession.

"The outlook for retailing, generally, in 2008 is unfavorable," Richard Hastings, retail economist at the Federation of Credit and Financial Professionals. "The 20-, 25-year expansion in the consumer/residential part of the economy has come to a cyclical conclusion and the spending capacity, the foundation for the entire industry, is simply not there."

Yet even aside from Wal-Mart, analysts expect some companies to prosper this year in spite of that, including teen retailers and possibly some beaten-down home improvement stores.

The National Retail Federation on Monday forecast a 3.5 percent increase in retail industry sales, excluding automobiles, gas stations and restaurants. That would be the lowest increase since 2002.


Retail stocks just completed their worst year since 2002, with the Standard & Poor's Retail index .RLX falling 17.9 percent. The index has already lost an additional 10 percent this year.

But Wal-Mart shares rose 3 percent in 2007, following three years of declines, and many analysts think the world's largest retailer should do well in 2008 as cash-strapped consumers look for low prices on staples like food and toilet paper.

"Discounters would tend to do better in this kind of environment," said Michael Niemira, chief economist at the International Council of Shopping Centers.

Goldman Sachs analysts on Monday recommended keeping Wal-Mart, as well as Costco Wholesale, as defensive positions in retail, "given negative sentiment, potential for negative macro events, likely downward EPS revisions and lack of positive catalysts."

Wal-Mart trades at about 13.9 times estimated earnings for the year beginning in February, which puts it in the lower half of the 30 stocks in the Dow Jones Industrial Average .DJI.

Many retailers struggled to attract shoppers in the second half of 2007 as consumers were hammered by soaring prices for food and fuel, rising payments on adjustable rate mortgages, declining home values, and job insecurity.

But some stores that sell clothing to teenagers bucked that trend and could do so again in 2008.


Liz Pierce, analyst at Roth Capital Partners, recommends "youth contemporary" retailers, "because I think that is the part of the population that will spend."

Among those retailers, she said Wet Seal, Urban Outfitters and Pacific Sunwear of California could be stocks to buy.

But while teens continue to shop, their parents are more likely to stay on the sidelines, analysts said.

Women's clothing retailers like Chico's FAS and Ann Taylor were hard hit in 2007, with their stocks falling 56.4 percent and 22.2 percent, respectively, and analysts do not expect that sector to do much better in 2008.

"There isn't a lot of possible feel-good news out there," Pierce said of the female shopper. "She's got other things that she's worried about and there's not as (many) new trends that she is compelled to update her wardrobe with."

Some retailers that have been beaten down could be getting ripe for a fresh look.

Gary Balter, analyst at Credit Suisse, on Monday upgraded three stocks directly hurt by the housing downturn -- Home Depot, Lowe's Cos and Bed Bath & Beyond -- to "outperform."

Home Depot, for example, trades at about 10.8 times estimated earnings for the upcoming fiscal year, one of the least expensive stocks in the Dow based on that measure.

But even Balter's endorsement of those stocks comes with a caveat.

"We are upgrading the names we view as the leaders, knowing that we are too early in some cases, but wanting to take advantage of stock prices we believe discount much of the impending doom."

(Editing by Braden Reddall)

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