3 Retail Picks in a Weak Economy

September earnings are in for many retailers and the results in many cases far surpassed analyst expectations. Overall, same store sales added 5.1 percent on projections of 4.6 percent. Some talking heads are predicting this momentum won’t last, as persistent volatility and ongoing anxiety over the structural challenges in Europe lie ahead.

Slow wage-growth and weak jobs data have also contributed to the sense that September may have been just a fluke, the result of stronger spending after Irene-inflicted weakness.  There is a fear that in the approaching months, where spending is usually higher, it won’t be. Trends in terms of the earnings seem to indicate that will not necessarily be the case. The same factors that will impact spending during the holiday season are in place now and it’s likely some of the patterns will carry over.
Perhaps the most apparent of these observations  can be explained by the old idiom, “The rich-get-richer; the poor-get-poorer.” The recent earnings statement showed that the most growth was happening at either end of the spectrum. Discount chains like Costco (COST) and TJMaxx (TJX) exhibited strong same-store earnings growth for the month, as did luxury retailers, for instance Saks (SKS) which saw impressive 9.3 percent improvements.

The corporations that could be expected to bear the brunt of the economic weakness and declining consumer sentiment are the middle range of retailers, or the stores we commonly find in malls from The Gap (GPS) to American Eagle (AEO).

While some may choose to avoid the sector altogether, others may be interested in contrarian investing, or snapping up shares of companies exhibiting recent strength at low prices.

An investigation into earnings, general market behavior and productivity, illuminates several of the companies that could be well positioned for ongoing growth in the remaining part of the year.

Costco Wholesale (COST)– Cotsco’s sales growth during September was incomparable. A 17 percent increase in net-sales came with the announcement that it would raise prices of its membership by 10 percent. The statement caused a reversal from an 11 percent gain in early trading, but it will likely have an opposite impact on the company’s bottom line. Unlike Netflix (NFLX) recent mark-up, which seemed to convey a less-for-more sentiment, Costco’s price hike is well deserved. On average, members spend only between $50-$100 per year to purchase goods being sold only at 15 percent above wholesale. Costco’s commitment to value is unparalleled in the market and the company’s 62.6 million members will end up far exceeding the membership cost by shopping at traditional food stores. The appeal of Costco is especially strong during the holidays when families have a greater need for the company’s higher price tag items like 15 lbs rib-eye or bulk wine which appeal to entertaining.

Beyond this, Costco continues to have excellent success with their new stores which will help drive growth on a more long-term basis. Unlike most new locations, which lose money in the first years, Costco has a history of success from the get-go.

To help inspire business in existing stores, Costco’s CEO continually adds new items to shelves in order to keep things interesting and incite customers to return before their bulk buys get low.

These factors, alongside the additional membership cash are sure to help the company’s bottom line. Historically, Costco members have a 90 percent return rate, an extra five is unlikely to dissuade such a dedicated base.

Saks (SKS)– On the opposite end of the spending spectrum is the new York based luxury retailer, Saks. Saks far exceeded the expectations of Wall St. today with impressive same-store growth of 9.3 percent. The company was not expected to thrive, but it did, and it could do the same through the holiday season. Wealthy people are still opening their wallets and they will continue to do so throughout the winter season, where gifts and fresh holiday apparel could help the company’s bottom line. Analysts seem to be applying a parachute of bearishness over the retail sector, Saks included, but recent data combats that sentiment.

The company is down a massive 12 percent year-to-date and 17 percent in the last three months in spite of optimistic earnings.

99 Cents Only Store (NDN)-Like Costco, the 99 cent store has really been shining in the weak market. The idea of getting items for way under cost is enough to inspire many Americans to head to the 99 cents store and it appears to be a good enough reason for private equity firms to  be squabbling over a buy for the chain.  After hours yesterday, it was reported that Ares Capital, a private equity firm outbid Leonard Green & Partners in their attempts to purchase NDN. Shares of the company started a sharp ascent yesterday that could continue until something is final.