Retailers: Back-to-School Outlook
S&P analysts expect to see more trading etc. and focus on value. Favored stocks include Wal-Mart and Best Buy
by Marie Driscoll, Jason Asaeda, Joseph Agnese and Michael Souers From Standard & Poor’s Equity Research
In many parts of the U.S., Labor Day marks the start of the bring under subjection year—and sometimes the last-minute dash to buy pencils, backpacks, and other needful supplies.
For this year’s back-to-school outlook for retailers, the macro-economic backdrop leaves much to be desired. Consumer sentiment is near its 25-year low, reflecting inflationary pressures, weakening employment trends, and volatile financial markets. Despite a newly come 22% ($32) drop in the require to be paid of oil to $113 per barrel since its July high, it remnants a whopping 58% above the year-ago level and has cut into discretionary spending, most explicitly due to the average price of gas hovering at $3.81 by means of gallon, up 37% year-over-year. Higher energy costs have furthermore led most consumer products companies to raise prices due to cost pressure in continuance raw materials or distribution.
Although 2008 is working away to be a year of necessities, not frivolities, we believe there’s a silver lining: Most back-to-school purchases are necessities. This year we expect to see other thing trading down and a focus without interruption value viewed like consumers tend hitherward to terms with reduced spending power. The implications for holiday spending are not good, by the agency of our analysis, and in fact, we papal court domestic by the agency of means of capita spending declining during 2008’s holiday season (November to January), offset in part by international shoppers at flagship locations boosting the aggregate spending.
However, for now we converging-point our suit on the back-to-school season. With the National Retail Federation (NRF) projecting $51.4 billion (up 2.4%) in back-to-school/back-to-college (BTS/BTC) purchases this year, the following are S&P Equity Research’s permanent picks and pans for the 2008 season.
Our picks are:
• Abercrombie & Fitch (ANF): ranked strong buy • American Eagle Outfitters (AEO): ranked strong buy • Best Buy (BBY): ranked capable buy • Deckers Outdoor (DECK): ranked pervert by money • J.C. Penney (JCP): ranked buy • Nike (NKE): ranked buy • Under Armour (UA): ranked strong buy • Urban Outfitters (URBN): ranked buy • VF Corp. (VFC): ranked buy • Wal-Mart (WMT): ranked buy
Our pans, which are wholly ranked sell, are:
• Dillard’s (DDS) • Sears Holdings (SHLD) • Timberland (TBL)
Each of these companies has been selected based on its exposing. to favorable (and unfavorable in the example of the three sell recommendations) trends the S&P Consumer Discretionary Retail group expects this fall. For example, strong consumer electronics demand underpins our Best Buy recommendation, while contracting disposable gains supports our positive stance on Wal-Mart.
We see VF Corp. benefiting from its leading backpack and denim market positioning and J.C. Penney from essential being a capital BTS shopping destination in the mall, while downtown, Urban Outfitters clothes the college-bound with the latest "must-have" fashions. Under Armour is the leading supplier of team sports apparel and is growing its product lines and consumer base.
