E-mail RSS NEW YORK - By all indications, America's retailers are looking ahead to a mute... How To Play: A Potential Holiday
High gas prices, falling consumer confidence and high levels of household debt have industry analysts predicting that growth in holiday spending will slow to a modest 4% to 4.5% annual pace this year, compared with the 6.7% clip reported by the National Retail Federation last year over 2003.
That's the consensus of a recent holiday-forecasting conference put on by the Retail Marketing Society in conjunction with Merrill Lynch and weather researcher Planalytics, despite a solid employment picture.
Major department stores will grow sales only 3.2%, as the lack of any single hot fashion item weighs on apparel purchases, according to a Merrill Lynch forecast. Price discounting, which in recent years has become as big a crutch for stores to use in moving merchandise at holiday time as they've been for auto dealers to move cars year-round, will be more aggressive than ever, industry economists say.
"The consumer is being cautious; their debt is down but is still at historically high levels," said Carl Steidtman, director of consumer research at Deloitte. He also noted that rising employee health insurance costs have begun squeezing margins at many big retailers who are unable to pass them along to customers in a price-driven environment.
But for investors thinking about an end-of-the year retail play, does the overall lack of excitement mean there aren't any opportunities worth checking out? Hardly. Specialty stores, such as (nyse: COH - news - people ) and (nyse: ANF - news - people ), which offer popular products able to hold the line on discounting, lead the list of solid bets that Wall Street is touting for fourth-quarter profit growth. So do luxury retailers, like (nyse: JWN - news - people ), whose customers are mostly immune to high energy costs.
"Christmas for some is a game of chicken," said Merrill Lynch analyst Mark Friedman, explaining that sales performance often comes down to who makes the first move to draw customers with profit-squeezing discounts to help unload inventory. Last year, most big promotions came within a week of Christmas, leading to strong sales in late December and January, which will be hard to match this year.
But despite labeling this season for specialty retailers as "Holiday 2005 on Thin Ice" in predicting the worst earnings growth in four years, Friedman sees some in the sector bucking the trend.
For example, he projects that Abercrombie & Fitch, with an appealing holiday lineup of velvet blazers, denims and sparkling sweaters, will grow sales 12% from last year as it holds firm on full pricing. The company's reputation for sinking money into sprucing up stores during the holiday season has helped make it a must-shop destination at America's malls, Friedman said. Wall Street is predicting Abercrombie & Fitch will earn $1.42 in the fourth quarter--24% more than last year.
Friedman is also predicting 12% sales growth at Coach, which has secured a niche as an upscale-yet-affordable chain. Coming off a 53% profit jump last quarter, Coach's holiday lineup will undoubtedly lure shoppers with a quality product mix at a wide range of prices--from richly detailed $600 handbags to wallets, iPod holders and belts for less than $100.
He also touted , whose quarterly earnings are predicted to nearly double from last year, rising to $1.65 per share. The company's 770 stores have earned consistently high margins thanks to quality children's clothing, strong inventory management and a minimum number of price-slashing promotions, Friedman said. He expects sales will grow 20% in 2006.
On the electronics front, Merrill analyst Danielle Fox said 's (nyse: BKS - news - people ) and (nyse: BGP - news - people ), both of which are likely to suffer from a lack of any hot titles along the lines of Harry Potter. A minimum of titillating music and DVD releases will also hurt, Fox said, since those items traditionally serve as big drivers of traffic to stores.
Fox saved her biggest recommendations for two companies not dependent on the holiday cycle-- (nyse: HD - news - people ) and (nyse: AAP - news - people ). Valuations of both are low compared with past Fed rate-hike cycles, she noted, adding that expected cold weather in the East by mid-December should spur demand for weather stripping and other house- and car-warming items. Home Depot is expected to grow earnings 17% this quarter to 55 cents per share, exceeding its third-quarter growth rate.
Meanwhile, there are buying opportunities in traditional large department stores, even as gas prices, home-heating bills and a slew of promotions keep overall sales growth low.
Upscale retailer Nordstrom is expected to continue its solid performance from last year, when it outpaced the broader industry with 6.9% same-store sales growth, according to Merrill Lynch's Stacy Turnof. Nordstrom is expected to grow profits 19% this quarter to 62 cents per share, thanks to both strong fashion choices and technology upgrades that have improved point-of-sale performance and inventory management.
Among mass-market retailers, Turnof is bullish on (nyse: JCP - news - people ), on pace to grow quarterly earnings 35% from last year to $1.57 per share. That would continue a sharp reversal for the company, which Wall Street predicts will earn $3.42 per share in 2005 and $4.04 in 2006. That's compared with a profit of $2.23 last year--not to mention a loss of nearly $1 billion in 2003.
"Better private labels, better marketing, a strong turnaround," Turnof said. Indeed, popular private labels, like Arizona Jeans, St. John's Bay casual clothes (for the 40-plus set) and the J.C. Penny Home Collection of towels, bedding and kitchen products, combine for more than $3 billion of the firm's $18 billion in annual sales.
The store's Christmas catalog has been a staple since the 1960s, and its emphasis on prepackaged gift sets--for everything from jewelry to perfume to sweaters--makes it a particularly popular stop for men looking to get their shopping done quickly.
This is cache, read story here