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An improving labor market and rising stock market have consumers feeling more confident about opening their wallets again - in spite of rising gas prices.
This trend can be seen in monthly retail sales:
This is great news for the retail industry, but does this mean that all retail stocks are worth buying?
Not So Fast
While the industry is expected to see solid growth overall this year, the retail industry will certainly see its share of winners and losers.
But how do you know which ones to buy and which ones to avoid?
One important item to look at is same-store sales. This metric compares sales across stores open at least a year. This is also known as comp sales.
This is beneficial because it allows investors and analysts to compare sales between different retailers and can alert them to shifts in consumer demand. Total sales growth, while important, will naturally be higher among retailers who are rapidly opening new stores or making acquisitions. Same-store sales ignores this, however, and only focuses on sales at existing stores.
It's also beneficial in that it excludes the "honeymoon phase" of strong sales typically experienced shortly after stores are opened in new locations.
Early Warning Signs
It can also make it easier to spot shifts in consumer tastes or preferences. Although overall sales for a company might be up, a few consecutive months of negative comp sales can signal trouble ahead.
Compare high-end retailer Nordstrom with off-price retailer TJX Companies, which owns T.J. Maxx, Marshalls and HomeGoods stores, during the heart of the Great Recession:
Clearly, consumer habits shifted away from luxury retailers and towards more value-oriented companies during the Great Recession.
But as the economy continues to pick up, which companies are now seeing consistent increases in same-store sales?
Here are 4 companies seeing strong same-store sales growth:
The Buckle is a mall-based retailer with 431 stores in 43 states. Earnings estimates have been surging along with sales. It is a Zacks #1 Rank (Strong Buy) stock.
Q4 2011: +11.3%
Q3 2011: +7.0%
Q2 2011: +10.8%
On the verge of bankrupcty during the Great Recession, this unique home furnishings retailer has come roaring back. It is now a Zacks #1 Rank (Strong Buy) stock.
Zumiez (pronounced "zoomies") is a retailer focused on action sports like skateboarding, surfing, snowboarding, motocross and BMX. It is a Zacks #1 Rank (Strong Buy) stock.
Q4 2011: +11.5%
Q3 2011: +9.6%
Q2 2011: +11.3%
Ulta Beauty provides one-stop shopping for salon products and services through 449 stores across 43 states. It is a Zacks #1 Rank (Strong Buy) stock.
When evaluating retail stocks, it's important to look at a company's recent same-store sales trends. These 4 are seeing strong demand for their products in existing locations, which should lead to rising earnings estimates and rising stock prices.
Todd Bunton is the Growth & Income Stock Strategist for Zacks.com and Co-Editor with Steve Reitmeister of the Reitmeister Value Investor that snaps up discounted value stocks and sells them after the market realizes their true worth for long-term gains.
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