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Retail Guide: Stocks Looking Up

Boosted by an end-of-year rally, battered footwear and retail stocks are getting back on course.

After bouncing back in late 2009 — following the disaster that was 2008 — retail and footwear stocks are poised to at least hold steady this year. That is, of course, if the economy continues to heal.

Unlike the beginning of 2009, when share prices were deeply depressed following the collapse of the financial markets the prior year, most stocks in 2010 are starting off at so-called fair value, which is an estimated market value that takes into consideration certain criteria, such as income valuation, equity analysts said.

Indeed, many footwear and retail stocks rallied big at the end of the year. Notable gainers included Crocs Inc., up 364 percent for the year, and Jones Apparel Group Inc., which rose 174 percent. Shares of Finish Line Inc. jumped 124 percent, while Shoe Carnival Inc. climbed 114 percent.

“The replenishment nature of footwear is the reason” for the sales increases, which were followed by positive stock price movement, said Scott Krasik, senior analyst at C.L. King & Associates. “Footwear and accessories are an easier purchase than apparel.”

But as a result, “it is harder to find areas or stocks where you feel like they’re super-undervalued. A lot [of retail stocks] went up 300 percent to 400 percent [in 2009]. They’ve already factored in that things are getting better. They never should have been as low as they were, so part of it is getting back to the norm. And the other part is factoring in a recovery. My sense is that [the economic improvement is] going to be spotty, in fits and starts,” said Jeff Van Sinderen of B. Riley & Co.

Consequently, stock picking could be very company-specific this year, analysts said, meaning that the firms that have set themselves up best to take advantage of the potential economic recovery will be the likely winners. “If you’ve done your work, as either a wholesaler or a retailer, you should be able to reap the benefits,” said Sam Poser, senior research analyst at Sterne Agee.

“You have to be a company that is very much ‘wear now, ship now.’ If you can ship quickly with a short lead time, then you can respond quickly to what a retailer wants now. There are only so many vendors that can do it,” Van Sinderen said.

The stock outlook rests on the strength of the fashion cycle, according to Krasik. “There is some viability in that there’s new fashion on the women’s side. Price points should be slightly higher, and we’ll continue to see boots be popular,” he predicted.

If the latest same-store sales reports from December are any indication, luxury retailers could be on the upswing. Though Van Sinderen said the high-end customer is clearly less fearful — due, in part, to the improvement in the stock market — he was hesitant to forecast a full-on recovery for that subsector. “The affluent consumer is still price conscious,” he said.

Already, many footwear firms are seeing better-than-expected fourth-quarter and full-year results (to be reported in February and March), which stands to boost stocks, noted Mary Delk, a director at Deloitte Consulting. “You will see lots of good news, and you will see Wall Street respond accordingly,” she said.

For Delk, the high-end and more value-added retail names will be the winners in 2010. “You’re seeing a tale of two consumers,” she said. “On one hand, we’re seeing a consumer who has more disposable income and who is feeling a little more secure about jobs and starting to spend again. And then there’s the other consumer who is still very financially constrained.”

Many market watchers noted that the macro numbers will be important, too. “It all depends on where those employment numbers go,” said R.J. Hottovy, equity analyst at Morningstar. “If we continue to see unemployment north of 10 percent, it’s going to be tough to see the [stock] gains sustained, and if [employment] bounces back, we will see a rise in consumer confidence possible.”

The outlook for the second half of the year, however, is a bit foggy. “[It] is dependent on a pickup in consumer spending. If retailers open up their supply chains a little more [by adding more inventory], then the back half could show some good growth, but there’s just not as much visibility [in the back half of the year],” Krasik said.

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