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Retail stock rally shows bullish bet on holiday sales

November 25, 2010 |  4:51 pm

Ahead of the big shopping weekend, Wall Street appears highly confident that American consumers aren’t going to disappoint the retail industry.

Stocks of major retailers have been among the market’s best performers in the rally that began in late August. On Wednesday many of the shares again led as the Standard & Poor’s 500 index rose 1.5%.

Shoppers An S&P index of 90 retail stocks jumped 2.4% for the day to its highest level since July 2007, and now is up 23.6% year to date. That’s more than three times the 7.5% price gain of the S&P 500 overall.

While many U.S. stocks remain well below their pre-recession peaks, a broad cross-section of retail issues hit all-time highs on Wednesday. That list included luxury jeweler Tiffany & Co., Limited Brands Inc., AutoZone Inc., Ross Stores Inc., and Tractor Supply Co.

It can’t be that investors expect a huge jump in spending this season -- not with unemployment at 9.6% and the housing market still moribund.

Still, the pace of consumer spending has picked up in the last few months after stalling in the second quarter. October personal spending was up 0.4% from the previous month after a 0.3% rise in September, the government reported Wednesday.

More important, there are glimmers of hope in the labor market, and that is raising expectations for future income growth. Significantly, new claims for unemployment benefits fell to 407,000 last week, the lowest since June 2008.

“In the coming months, consumer spending growth should remain solid, given that the trend in employment appears to be continuing to improve,” analysts at Strategas Research Partners in New York said in a note Wednesday.

Could that be too optimistic? Maybe. The monthly consumer confidence index from Thomson Reuters and the University of Michigan rose to 71.6 for November, up from 67.7 in October but still below the 2010 high of 76.0 in June.

And just 25% of all households in the latest survey said they expected their finances to improve over the next year, below the 29% reading of a year earlier.

“Holiday sales will be based, more than ever, on the availability of discounts as consumers continue to cope with their dismal financial circumstances,” said Richard Curtin, the survey’s director.

Yet that may still allow for decent retailer earnings this holiday season. Many major retailers, like other U.S. companies, have spent the last two years slashing costs to the bone.

Deborah Weinswig, who heads Citigroup Global Markets’ team of retail analysts, noted in a Barron’s interview this week:

Retailers got more efficient. They cut capital spending, but still invested in technology that made their supply chains and labor forces much more efficient and allowed them to optimize prices, markdowns and floor space. Many retailers can now leverage profit off lower gains in same-store sales. It was a big theme during the third-quarter earnings season among the retailers we have “buys” on. Warm autumn weather made for tough sales, but not companies’ earnings. In fact, department-store chains like Saks, Nordstrom and J.C. Penney are seeing greater earnings growth than many people thought possible in this environment.

Meanwhile, at the upper end of the retail spectrum, many well-off consumers -- and those who aspire to be --  appear to be spending freely, which is bound to help retailers in general.

Tiffany on Wednesday said earnings jumped 27% in the quarter ended Oct. 31 on a 14% rise in global sales. Same-store sales surged 11% in Asia, but even in the Americas the same-store sales increase was a strong 5%.

And so far in the current quarter, overall “sales growth is exceeding our expectations,” Tiffany CEO Michael Kowalski said in a statement.

The company’s shares rose $3.06, or 5.3%, to a record $61.33 on Wednesday. Also at a new high: Luxury leather goods maker Coach Inc., up $2.06 to $56.63.

For the upper-end retailers, at least, the Great Recession is only a dim memory.

-- Tom Petruno

Photo: Shoppers in New York on Wednesday. Credit: Mark Lennihan / Associated Press