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So-so holiday season augurs iffy market for retail stocks


Shoppers are going to be out in force Friday.

But at many of the nation's retailers, the holiday season started weeks ago. Promotions and sales have been running full bore as nervous companies try to get an early start in putting consumers into a holiday buying mood.

The fear for retailers was that waiting until the day after Thanksgiving, traditionally the year's busiest shopping day, would be too late.

The portion of household income spent on holiday gifts has been edging lower for years, while family debt is at an all-time high. Factor in higher prices for gasoline, home heating oil and natural gas, and this becomes another iffy shopping season and a cause of concern for investors in retail stocks.

The International Council of Shopping Centers forecasts that sales will be 3 percent to 3.5 percent higher in the last two months of this year than they were last year. That compares with increases of 2.3 percent last year, 4 percent in 2003 and 0.5 percent in 2002.

Investors in shares of the retailers know improved sales figures alone do not indicate success. Profit margins are what count, because a full season of big discounts won't nourish profits.

The most inspiring holiday sales gains of recent years were at the height of the technology and stock market boom, with a 5.1 percent sales increase in 1998 and 5.4 percent rise in 1999.

If consumers do get into the swing of things this holiday season, retailers can avoid taking desperate measures. Because the stock market has factored a so-so sales season into reduced prices for many retailers' shares, even a modest positive surprise could give their stocks a significant boost.

"Companies need to be loud with promotions to get customers into stores and clear their inventory," said Gabrielle Kivitz, specialty-apparel retailing analyst with Deutsche Banc Securities in New York. "Inventory levels have been building because the fall sales season was disappointing due to weather, gas prices, hurricane implications and hits to consumer confidence."

One option for investors who believe in the sector is Merrill Lynch's Retail HOLDRs exchange-traded fund, which holds 18 retailers, including giant discounter Wal-Mart Stores Inc., grocers, drugstores and department store chains.

Overall, retail stocks have been largely flat this year after rising in 2003 and 2004.

One phenomenon retailers have noted is that gift-giving is changing. The holiday sweater "has become as stale as a fruitcake from grandma," Kivitz noted, while gift cards that let recipients choose their own items are increasingly popular.

In the youth market, a hip retailer becoming known as a source for such gift cards is Urban Outfitters Inc., whose stock Kivitz recommends because it is unusual in its store environment and merchandise. She also likes the stock of Polo Ralph Lauren Corp. because it has taken control of its brand to elevate it and is coordinating efforts with the department stores that sell it.

"One thing I've learned from covering these stocks is that you can never count out the American consumer," said Rob Plaza, senior retailing analyst for Zacks Investment Research in Chicago. "I don't think current gas prices will dissuade people from going to the mall to see what's available, though a really cold winter that impacts home heating oil and natural gas costs might make a difference."

Among individual stocks, whatever the weather, Plaza thinks GameStop Corp., which recently acquired archrival Electronics Boutique, should do well this holiday season and recommends its shares. It is by far the largest retailer in the popular field of video games. A new video game cycle is starting with the rollout of Microsoft's Xbox 360 and continues with the spring introduction of the new Sony PlayStation, he said.

The popularity of buying gifts online not only helps such sites as eBay Inc., a Plaza recommendation much of this year, but also has all retailers taking the Web seriously.

"While the shift to online retail sales has slowed a bit, many companies now view their Web site as an integral part of their business," said Joseph Beaulieu, stock analyst with Morningstar Inc. in Chicago. "They're exerting more direct control over their Web sites rather than outsourcing them, as indicated by the Barnes & Noble purchase of"

Whether the customer is buying in a store or online, a reputation for low prices and popular products often carries the day. That's why household names Target Corp. in upscale discount retailing, Best Buy Co. in discount consumer electronics and Wal-Mart as the world's largest retailer should do well this holiday season and their stocks are worth buying, Beaulieu said.

Shares of Wal-Mart, in particular, have slid over the past year and have attracted attention from value investors who see its stock as a potential bargain.

Luxury retailers don't have to discount because their customers continue to shop, choosing style over price.

Coach Inc., enjoying strong sales of its handbags and other accessories, and Tiffany & Co., whose 165-year-old brand gives it an edge in the luxury jewelry business, are Morningstar stock recommendations. Because both derive significant profits from Japan, continued solid economic improvements in that country would be a bonus.

These days, new strip malls, rather than traditional large shopping malls, are being built. That leaves some retailers out in the cold, amid concern that traditional department stores are being squeezed by successful discounters and higher-end merchants.

"We have seen good numbers from J.C. Penney Co., and Federated Department Stores Inc. is one of the better-operated department stores," Plaza said.

"However, there has to be a compelling reason to go into a shopping mall and walk around rather than just run into one store in a strip mall, and this hurts second- and third-tier department stores."

Andrew Leckey writes for Tribune Media Services.

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