Retail Stocks Rise In August, But The Best May Be Behind Them

Retail stocks rose in August for a third straight month but the pace of growth was tempered, with investors becoming more discerning as many shares approached highs not seen since last fall and as second-quarter earnings beats were largely on cost cuts, not top-line growth.

Expectations for a sluggish back-to-school-season and wariness about the holidays could cap further significant gains for a group that has been outpacing the broader market.

Retailers that retain investor appeal include Wal-Mart Stores Inc. (WMT), Sherwin-Williams Co. (SHW) and Staples Inc. (SPLS) because they are likely to be able to grow their sales in 2010, Morgan Stanley said.

Sears Holdings Corp. (SHLD), Best Buy Inc. (BBY) and Dick's Sporting Goods Inc. (DKS) are among retailers whose continued customer traffic "issues" temper sales expectations, Morgan Stanley said.

The Standard & Poor's Retail Index is up 5.2% for August, with one full trading session left in the month. The performance compares with the S&P 500's 4.3% gain over the period. The S&P Retail Index has now risen 38% since the year began, while the S&P 500 is up 14%.

Williams-Sonoma is the S&P Retail Index's best performer so far in August, gaining 36% to $19.16. Tiffany was also a major mover, up 25% for the month. The jewelry chain is being aided by Friday's 11% gain after posting a second-quarter earnings beat and raising full-year expectations.

Buckle Inc. (BKE) was among the month's biggest decliners, down 12% as sales-growth momentum slowed. Barnes & Noble (BKS) also fared poorly, losing 9.3% to $20.88 after posting a big drop in second-quarter earnings during the month.

Investors will get a sense of retailers' next hurdle -- the back-to-school selling season -- next week, when the group posts same-store-sales for August. Retailers are expected to turn in a better performance than July's dismal showing, with August showing a 3.9% decline based on preliminary figures from Thomson Reuters, compared with July's 5.1% drop.

A month-over-month improvement will not necessarily be the result of more customer spending, though. Retailers face much easier comparisons. August of last year represented the period when the bottom really started dropping out for retailers. As a result, same-store-sales rose just 0.2% that month. The prior month, July 2008, same-store-sales grew by 1.1%, putting retailers up against a higher hurdle this past July. September, when comps turned negative last year, should allow even more improvement when retailers post next month's figures.

August same-store-sales may also be affected by Labor Day falling later in September. An offsetting factor is that most states switched their tax-free shopping days to August this year from July last year.

But even with the tax-free shift, some 83% of consumers are making an effort to save on back-to-school spending, according to a survey of almost 1,800 online consumers by PriceGrabber.com.

August figures may also be affected by layaway plans that are growing in popularity. Sears Holdings Inc. is seeing "much more" use of its program this year than in 2008, with merchandise ranging from apparel to pencils being placed aside for full payment, Sears spokesman Tom Aiello said.

-By Karen Talley; Dow Jones Newswires; [e-mail]; 212-416-2196