The Retailers Poised to Survive, Then Thrive

The holiday shopping season is forecast to be weak, but S&P retail analysts see growth potential for a number of companies despite the tough times

By Beth Piskora From Standard & Poor's Equity Research

Like Santa, you've probably been making a list, checking it twice, and mostly trying to figure out how to cut back on spending—for the holidays and in your day-to-day life.

U.S. consumer confidence plunged to 38.0, a record low, in October, well below the 61.4 reading in September and the 99.5 figure seen a year ago. Markets expected a more modest decline to 52.0. The present situation index dropped to 41.9 from 61.1, while the expectations index plummeted to 35.5 from 61.5.

"This disappointing report adds more risk to an already challenging holiday season," says David Wyss, chief economist for Standard & Poor's.

What does it all mean for the retailers, and retailing stocks? The outlook is not good.

"Stock market volatility, bank closings, rising unemployment, and the Presidential election are enough to divert trained shoppers," says Marie Driscoll, head of the consumer discretionary-retail equity analysis team. "Then, too, a negative wealth effect from dwindling 401(k)s and deteriorating real estate values, along with inflationary pressures, are enough to restrain the most ardent of shoppers. On the apparel front, we rarely see that item that prompts an 'I must have it!' response. Until merchants properly merchandise, S&P looks for deteriorating productivity as measured by same-store sales."

Some Will Fall

That's not just bad news for the holiday season. According to Wyss, it means some retailers will no longer be around this time next year. He theorizes that most retailers fail in the beginning of an upturn because they cut so much during the downturn, they lose out to better-capitalized rivals when the upturn begins.

Wyss says the bottom will be the first quarter of 2009, so retailers who are likely to fail will have most likely done so, in his opinion, by the summer/fall of 2009. Some companies have already filed for bankruptcy, including Circuit City, Barbecues Galore, Bennigan's, Boscov's, Mrs. Fields, and Steve & Barry's.

We polled S&P's retail equity analysts for names for which they have a high level of confidence will survive the recession and are best positioned to eventually thrive. We found 16 retail stocks that are ranked 5 STARS (strong buy) or 4 STARS (buy):

Amazon (AMZN)
Best Buy (BBY)
Coach (COH)
Dollar Tree (DLTR)
Family Dollar Stores (FDO)
GameStop (GME)
Guess (GES)
Home Depot (HD)
J. Crew Group (JCG)
OfficeMax (OMX)
PetSmart (PETM)
Ross Stores (ROST)
Staples (SPLS)
TJX (TJX)
Urban Outfitters (URBN)
Wal-Mart (WMT)

Piskora is managing editor of U.S. Editorial Operations for Standard & Poor's .