Playing the retail sector

Written by Andrew Szabo
Wednesday, 19 August 2009 23:00

Andy Szabo has no personal holdings or interest in the following referenced investments and has received no compensation for providing the research from any of the listed companies. This column is not a substitute for individualized advice from an adviser or accountant.

On Friday, the Department of Commerce released a dismal report on retail sales. Those seeking “green shoots” in economic statistics will have to look elsewhere.

The “cash for clunkers” program, a one-time shot in the arm for the auto industry, proved less stimulative than anecdotes from dealer showrooms suggested. Motor vehicle and parts sales rose only 2.4% and auto sales alone were up 2.8%. (All economic comparisons here will be month to month — in this case from the end of June to the end of July).

Outside of the automotive sector, sales fell 0.6%, versus a Wall Street consensus forecast of +0.8%, a 1.4% difference. According to The Wall Street Journal, about one-third of the decline was the result of falling gasoline prices and, therefore, sales at the pump. However, the weakness in retailing, with the exception of restaurants and apparel, was marked. Consumers represent 89% of private sector gross domestic product, and seem to be taking a vacation from their free-spending ways of the past. (See “Economists React: ‘Back to the Drawing Board’ on Retail Sales” — Wall Street Journal blog, Aug. 13.)

The weakness in retailing reflects several factors. First, there has been a fall in disposable income among many consumers. Second, the availability of equity lines of credits as a sort of consumer piggy bank for purchases, has lessened, to say the least. Third, high levels of unemployment and partial employment, and even more importantly, fear of future unemployment, are depressing demand. Finally, there is evidence of change among U.S. consumers toward a higher rate of saving (off a base of very low saving or even dissaving). These four factors each have the ability to persist for some time after we have emerged from “recession” as it is usually defined (two successive quarters of decline in gross domestic product).

The retailers who have performed the best during this recession have been the value leaders: McDonald’s, Wal-Mart, Dollar Tree. I went with my daughter to Kohl’s on Sunday to shop for her going away to college, and there were a good number of people shopping. However, I believe the next leg of the market will bring less obvious names to the forefront.

I ran a quantitative screen looking for retail companies and restaurants with strong balance sheets, good operating momentum, good value and outperformance of analyst expectations. From that list, I selected several using qualitative criteria such as brand strength and management quality. Here are my recommendations, giving stock ticker, present price per share (as of market close, Aug. 16) and my blurb:

• Aeropostale (“ARO”) — clearer skies ahead for this well-managed chain
• Chipotle Mexican Grill (“CMG”) — put a little spice in your portfolio; still room for growth.
• True Religion Apparel (“TRLG”) — apparel — if you don’t have True Religion, get it.

Andy Szabo CFA is managing director of Greenwich Financial Management Inc., a registered investment adviser. Questions, call 531-2877 or e-mail This e-mail address is being protected from spambots. You need JavaScript enabled to view it . Previous columns may be found at Blog.GreenwichFinancial.com.