Is Now The Time To Buy Retail Stocks?

An article in Barron's says it might be given that the sector is under-performing the rest of the market and that some of the stocks are trading at their lowest levels since 2005. Many of the stocks in this space have been hit. Macy's is down 22 percent, Nordstrom, 34 percent, Saks, down 12 percent; Coach down 25 percent. But that others, like Costco (up 26 percent) and Target (up 3 percent) are doing OK. The big question seems to be how much of the price plunge and the decline of same-store sales this fall was from the warm weather and how much was from worries about the economy.

"We believe that 50% of the weakness in the past two months in non housing-related business is due to the seasonally warm weather," David Berman, a hedge-fund manager at Durban Capital told Barron's. "The balance of the weakness is due to the general macro environment, which has been weak for almost a year, and continues to deteriorate." Berman likes retail stocks for a short-term trade, but thinks estimates will be guided down in 2008 as peak operating margins continue to deteriorate.

Barry Ritholz, a writer on Seeking Alpha thinks the stocks have further to fall. "This is only a guess on my part, but it does looks a bit early to be making a contrary bet on Retailers -- especially if Food and Energy prices stay high, or the rest of the economy continues to cool."

I think it is interesting that Nordstrom and Saks are down so much when many of the luxury companies that sell to them are doing OK. And that Costco and Target depend far less on the weather for sales. This indicates to me that the weather is largely to blame for the bad autumn sales at clothing retailers in the U.S. With Christmas around the corner and a chill finally in the air, I think the sales, and these stocks, will pick up.