Don't Run From Retail Just Yet

 | Oct 25, 2013 | 12:30 PM EDT
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You have to love the disconnect between the 30%-plus performance in the SPDR S&P Retail Index (XRT) year to date and recent trends in retail stores. It is clear that traffic hit a wall this summer and few retailers have been able to jump the hurdle this fall.

The low end has obviously been suffering the most and that won't change anytime soon, especially as food-stamp benefits are set to decline in November. That means consumers will have to shell out more on needs and less on wants. Translation: see the discretionary high-margin category at dollar stores continue to decline, and don't expect Wal-Mart's (WMT) comp traffic to turn positive any time soon. This month's WMT analyst day meeting said it all -- well, the company said nothing about current comp trends, which said it all. 

Forget the lackluster traffic in the malls and elsewhere. We can also throw in a few additional pressures this holiday season: 

  1. Six fewer shopping days.
  2. Thanksgivingukkah: Hanukkah falls on Thanksgiving this year, which means many consumers will be combining the two holidays. That also means retailers may start the promotional hamster wheel before Black Friday -- or now it is Black Thursday as retailers open at 8 p.m. Thanksgiving day. Translation: More mess on the margin side.
  3. A terrible fashion cycle, unless you like all black, dreary green, impossible-to-wear orange and too much leather.

Before you run from all retail, consider two consistent plays:

  1. L Brands (LTD) has been one of the most consistent players and should continue to outperform. That is the power of a category killer, and Europe is just getting started.
  2. TJX Cos. (TJX) hosted an analyst day this week and this is our second retailer outlier. The company raised comp guidance and increased long-term square-footage opportunity. We shouldn't be surprised vendors are knocking on TJX's door. Guess who is in the driver's seat as consumers turn to off-price discounting, first for their fashion and home needs? We prefer TJX over Ross Stores (ROST) as TJX is all over the European opportunity while ROST is staying local.

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