Retailers' Registers Are Ringing

Consumers are showing a willingness to spend, even as they watch their budgets.

This morning, the Commerce Department said that retailers saw sales rose 0.5% last month, excluding motor vehicles and parts. Furniture & home furnishing stores, health & personal care stores, general merchandise stores and gasoline stations all saw increases of 0.8% or better.

(The hangover from the Cash for Clunkers program resulted in an 11.8% drop in sales at auto dealers. This skewed the overall change in retail sales down to -1.5%.)

The increase may seem surprising given the economic backdrop. After all, unemployment is rising towards 10% and another wave of foreclosures could be forthcoming as adjustable rate mortgages reset. On the other hand, the majority of Americans are employed and the improving economic data is probably giving consumers some confidence, even if the sentiment surveys are less clear.

Plus, the Commerce Department's data is backed up by rising sales at several retailers. For instance, Limited Brands (LTD - Snapshot Report), Kohl's (KSS - Snapshot Report) and Target (TGT - Snapshot Report) saw an improvement last month.

Of course, some of the biggest increases continue to occur at the discount retail chains. Ross Stores (ROST - Snapshot Report) and TJX Companies (TJX - Snapshot Report) both said September same-store sales jumped by 7% or more.

Sales Benefiting From Several Factors

There was no single key driver to explain the improvement in sales. Traffic was better and Target noted that the average transaction continues to improve. Costco (COST - Snapshot Report) executives observed that though coupon use has increased, consumers are still spending essentially the same amount of the register.

Unseasonably cool weather may have also played a role. TJX saw increased demand for fall apparel. The good weather across much of the country may have also given people reason to go out and shop. Not to mention that the calm hurricane season probably helped stores in the Southeast.

Again, the economy is also playing a role. With business conditions stabilizing, consumers are more willing to open their wallets. Though spending patterns will remain comparatively depressed well into 2010, and probably longer, even relatively small increases can make a difference in the data.

Retail Remains A Top Sector

Despite rising unemployment, Retail has been among the top-ranked sectors for many months. Several retailers have been able to top analyst expectations, resulting in positive earnings estimate revisions.

Last week, several companies raised their third-quarter guidance, including KSS, ROST, TJX and TGT. Though LTD did not provide any guidance, 10 out of the 15 covering analysts raised their third-quarter projections. The full year Zacks Consensus Estimate has recently been raised on all 5 companies.

There is no doubt that retailers still face challenging conditions. The National Retail Federation expects holiday shoppers to spend 1% less this year than last year. However, as long as retailers continue to perform better than expectations, their stocks should continue to rise. This is why I hold Retail SPDR (XRT) in Zacks ETF Trader.

Zacks Rank and Industry Classification

ROST, TGT and TJX are Zacks #1 Rank ("strong buy") stocks. COST is a Zacks #2 Rank ("buy") stock. All of them are classified in Retail-Discount.

LTD is a Zacks #1 Rank stock classified in Retail/Apparel-Shoe. KSS is a Zacks #1 Rank stock classified in Retail-Regional Department Stores.

Zacks Premium and Zacks Elite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.