Despite stock slides in the sector that are helping drag down the S&P Retail Index (XRT) , the upcoming holiday season should be a big one for retail companies.
As such, shares of companies like Stock of the Day Macy's (M) , Kohl's (KSS) and Nordstrom (JWN) , as well as retail giant Walmart (WMT) that are currently dipping downward could be good pickups before gifting season.
Here's why.
Strong Consumer
The last two years have been very strong holiday seasons for retail and set a high bar for companies looking to replicate recent success.
However, recent jobs reports and CPI numbers reflect the ability of the strengthened consumer in the United States to sustain the momentum of strong holiday season sales.
Earlier this month, jobs figures leapt by 250,000 and wages charted their biggest annual gain since 2009. The higher capital base of a more gainfully employed consumers bodes very well for the upcoming peak season.
Additionally, buying on Wednesday's dip could be further helped if October retail numbers, due for release on Thursday, come up above estimates.
To be sure, the CPI numbers released on Wednesday could add to worries about inflation given it just jumped by its second-highest percentage this year.
If inflation picks up, it could significantly weaken the prospects of a prosperous holiday season for retailers. For now, much of this is fear of a "first sign" of inflation as former Federal Reserve chair Alan Greenspan put it.
Scooping up Market Share
The retail space is also far less crowded than it once was.
Notable among the departed are former holiday retail giants Sears (SHLD) and Toys R Us, which will offer major markets to retailers who sell tools, appliances, apparel, and toys.
Hardware stores like Home Depot (HD) and Lowe's (LOW) will likely get a pick-me-up from the weaker position of now-bankrupt Sears, while companies like Target (TGT) and Walmart can become new hubs for toys and other purchases.
Additionally, Sears' overlap with JCPenney (JCP) on price point and mall locations will offer a tailwind to JCPenney's flagging clothing sales.
For the higher department store price point, the liquidation of Bon-Ton (BONTQ) will offer yet another holiday tailwind.
Macy's CEO Jeff Gennette touched on just this topic in his assessment of the upcoming holiday shopping season.
"As you would've probably expected, we have very little customer overlap with Sears so I don't see that affecting us much," he told analysts. "When I look at something like Bon-Ton when that goes out of the Midwest, that definitely affected us."
He noted that Bon Ton shoppers tend to look for products that Macy's carries, at a similar price point and in nearby locations, which points to Macy's being a recipient of the stranded shoppers.
"We've done a lot of outreach to those customers," Gennette said, adding that Macy's has also reached out to retail associates for its upcoming holiday seasons that will require a ramp-up in hiring.
"We currently prefer KSS to M given KSS' better real estate positioning, but see M shares having an upward bias through holiday given improving momentum," Jefferies analyst Randy Konik said, summing up the momentum move behind the sector development.
The only question that comes of the sector's consolidation is whether that simply gets directed online. If so, Amazon (AMZN) is a winner yet again.
However, it would not appear that Amazon is going to gobble up share as it has in the past, especially since neither Sears nor Toys R Us were truly killed by Amazon and online shopping, but rather by ballooning debt and mismanagement.
Additionally, retailers like Kohl's are protected from Amazon's cannibalistic tendencies due to its partnership with the Jeff Bezos-led behemoth.
Bottom Line
Obviously not all retailers are created the same. The year-to-date returns for companies like Macy's and Kohl's versus the returns from companies like JCPenney and the Gap (GPS) illustrate that perfectly.
If investors can choose correctly amidst that bunch, possibly looking at mid- to high-end gift giving companies, the sector could send some yuletide cheer.
