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One factor hanging over the entire retail clothing sector is the state of the U.S. economy. Its growth rate has been stuck in low gear – and unemployment remains at a high level. (Damian Dovarganes/Associated Press)
One factor hanging over the entire retail clothing sector is the state of the U.S. economy. Its growth rate has been stuck in low gear – and unemployment remains at a high level. (Damian Dovarganes/Associated Press)

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Bargain shopping for U.S. retail stocks Add to ...

It was an ugly second quarter for many American retailers. From Aeropostale Inc. to Target Corp., Staples Inc. to J.C. Penney Co. Inc., one company after another reported lower than expected revenue and profit – and as a result saw their stock prices take a hit.

Those Q2 results were soon followed by sales figures for the month of August – and they were similarly disappointing. The retailers tracked by Thomson Reuters did manage to increase sales at stores open for at least a year by an average of 2.9 per cent. But that was less than the 3.2-per-cent increase analysts were expecting – and far below the 6.5-per-cent increase in the same month the year before.

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So if the American retail scene is so dismal, why should investors consider buying into it? One reason is portfolio diversification. There are a limited number of publicly traded Canadian retailers – so unless they dabble internationally, Canadian investors have difficulty diversifying and building a representative sector weighting in their portfolio.

A second reason is simple bargain hunting – with many U.S. retail stocks taking a recent dip, there are opportunities for value investors.

But the key may be picking your spots and playing the trends in the retail space.

“The state of the U.S. consumer seems fine, but his or her money all seems to be going into houses, home goods, cars and tech so far in 2013, not apparel and accessories,” says Jan Rogers Kniffen, an analyst and consultant at J. Rogers Kniffen Worldwide Enterprises in New York, with more than 25 years of experience in the sector.

“Soft goods are slow, hard goods are strong,” Mr. Kniffen says. He notes weakness in women’s and men’s clothing, and the business of selling to teenagers is “terrible.” He says that segment has been hurt by an increase in social security taxes, as well as the high teen unemployment rate.

Despite that tough environment, Mr. Kniffen says there are some companies in the teen segment that are likely to succeed. He believes shares of Abercrombie & Fitch are “oversold” – they fell from the $50 range to below $40, as one of the companies to report disappointing second-quarter results. Mr. Kniffen says Abercrombie is improving its product offerings at both its main stores, as well as at its Hollister chain. Other apparel-related stocks favoured by Mr. Kniffen include Chico’s Inc. and The Children’s Place.

Overall, Mr. Kniffen sees this as the toughest, most price-sensitive selling season since 2009. He says there are two ways retailers will be successful in discretionary retail. The first is to be a leader in low prices (and costs). One company he likes on this front is TJX Cos. Inc., the company behind T.J. Maxx and Marshalls in the United States, and Winners and HomeSense here in Canada. The other is Ross Stores Inc., the largest off-price apparel and home fashion chain in the United States.

Mr. Kniffen says the second path for retailers to succeed in this environment is what he calls an “omnichannel” approach that captures online shoppers as well as the in-store customer. He points to Macy’s Inc. as arguably the best omnichannel discretionary retailer, with online sales growing at more than 40 per cent – a rate greater than online shopping juggernaut Amazon.

One factor hanging over the entire sector is the state of the U.S. economy. Its growth rate has been stuck in low gear – and unemployment remains at a high level.

“It’s been a very slow recovery – parts of the economy are doing well, but the lower end of the income scale continues to be particularly stressed,” says Faye Landes, managing director and senior research analyst at New York-based investment bank Cowen and Company. She says the economic squeeze is being felt by discount retailers such as Wal-Mart and Target. Nevertheless, she sees some strong opportunities for investors.

One of her top picks is Ralph Lauren. She notes it is a global brand, operating around the world, rather than just in the United States. As well, she likes its presence in many product categories, and feels it still has many opportunities to grow. “We love it at this price as an entry point,” Ms. Landes says. Ralph Lauren shares fell from nearly $190 apiece in August to nearly $160 after it, too, had underwhelming second-quarter results.

Another of Ms. Landes’s top choices is Nike. She says it is also a truly global brand that has managed to do something this year not many other consumer companies have been able to do – raise selling prices without seeing a significant drop in sales volumes. Ms. Landes notes the perception of the brand is stronger than ever – and it just got an added boost by being added to the 30-stock Dow Jones Industrial Average.

There are some major events coming up on the calendar for all of the U.S. retailers. In a few weeks those that announce their monthly sales figures will disclose their same-store-sales totals for September. That month includes most of the back-to-school shopping season that is key for many segments.

That will be followed by third-quarter earnings, when many companies will be looking to bounce back from their disappointing Q2. Then comes the all-important holiday shopping season, which can make or break the year for so many retailers. Mr. Kniffen is already predicting one winner for the holidays. He predicts Macy’s integration of its stores and online/mobile shopping services will find great success.

“Macy’s is winning with its ‘omnichannel’ approach,” Mr. Kniffen says. “And it is the place to go for gift giving. Do you want your gift in a Sears, Kmart or Wal-Mart box, or a Macy’s box?”

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