Wariness on consumer shares as Black Friday nears

Shoppers are pictured at the Glendale Galleria shopping mall on Black Friday in Glendale, California November 28, 2008.

NEW YORK (Reuters) - Black Friday looms large for top U.S. retailers, many of whom have racked up big gains in the stock market in 2009 on optimism for a robust rebound in economic demand.

As doubts have crept in as to whether recent economic growth can be sustained, or whether the third-quarter rebound was merely an outlier, investors have started to retreat from sellers of discretionary items and retrench into defensive-oriented names.

The S&P 500 is up more than 60 percent since hitting 12-year lows in March, and consumer discretionary shares are among the leaders, in part because they reacted quickly to reduce inventories as sales fell off.

But investors are worried headed into an uncertain U.S. holiday shopping season. Retailers as diverse as Kohl's (KSS.N) and Saks Inc (SKS.N) have warned of a sluggish holiday season.

"This is the most sensitive part of the year and it is the most sensitive aspect of our economy," said Cummins Catherwood, managing director at Boenning and Scattergood in West Conshohocken, Pennsylvania.

The S&P Consumer Discretionary index .GSPD has risen nearly 35 percent this year, outpacing the 13.7 percent rise in the S&P Consumer Staples .GSPS index.

Over the past month the trend has reversed, however, with large-cap staples up 4.4 percent and discretionary stocks up 2.5 percent, reflecting a bit of defensive repositioning due to re-emerging worries about consumer demand.

LUXURY LEADS

Black Friday features midnight store openings and big discounts in an effort to lure consumers to the stores. Last year was the first year in this decade that holiday sales fell from the year-ago period, according to the International Council of Shopping Centers.

Sales of general merchandise, apparel, furniture and other products fell by 5.3 percent in the November-December 2008 holiday shopping season, according to the ICSC.

For this year, the ICSC expects a 1 to 2 percent rise in sales. But is that enough to be considered a success? [ID:nN22240569]

Economic data does not point to robust fourth-quarter growth. This leaves investors itchy for signs that consumer spending, which accounts for nearly 70 percent of the economy, is picking up in the holiday season.

Retail giants such as Wal-Mart Stores Inc (WMT.N) and Target Corp (TGT.N) gave tentative outlooks for the fourth quarter and holiday shopping season.

Even luxury retailers have been cautious. Saks said last week that sales are still struggling.

Purveyors of high-end goods have done well in 2009. Saks is up nearly 47 percent on the year, while jeweler Tiffany & Co (TIF.N) has risen more than 75 percent in 2009. Mid-level chain stores have also done well: Gap Inc (GPS.N) is up 63 percent on the year.

Wal-Mart, by contrast, is down 2.2 percent in 2009.

The performance of those names indicates expectations that the recovery may be felt first among the wealthy.

"The higher-end consumer is much more exposed or leveraged to the stock market than they are the real estate market as a percent of their household net worth," said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York.

"With the improvement in the stock market, the higher-end consumer will be spending more here."

The rebound in these stocks, however, has also been attributed to stronger inventory control as spending has slumped.

"These guys have got into the mode of managing in a real weak environment, so if you get a little uptick or stabilization that we've seen, it's pretty good for them," said Scott Billeaudeau, portfolio manager at Fifth Third Asset Management in Minneapolis.

The Thomson Reuters Same Store sales index rose in October for the second month in a row, posting its best performance since June 2008.

But if the recent economic improvement proves to have been a blip, the discretionary names will feel it.

Consumers, enticed with price-slashing are guaranteed to generate big lines outside stores on Black Friday. It's the sales results that will determine whether investors show the same faith in stocks of shoppers' favorites.