How to play it: Riding the holiday shopping wave

Fri Nov 11, 2011 11:52am EST

A woman shops for toys in a Kmart store in New York City, December 6, 2010.  REUTERS/Mike Segar

A woman shops for toys in a Kmart store in New York City, December 6, 2010.

Credit: Reuters/Mike Segar

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(Reuters) - Retailers have grappled with rising commodity costs, thinning margins and jittery consumer confidence all year. Now they're set for the ultimate test: The make-or-break holiday shopping season, which accounts for 20-to-30 percent of all retail sales.

Despite the still-sluggish economy, holiday retail sales are expected to rise 2 to 6 percent this year over the same time last year, according to analysts. In actual dollars, holiday spending is expected to reach $465 billion, according to the National Retail Federation.

Shipping companies like UPS and FedEx say that boost will also mean increased business for them, with FedEx projecting a 12 percent increase in shipping volume during the season.

Of course, not every retailer or business that could benefit from holiday sales will actually find profits in their stockings.

How to find and play the holiday shopping season winners:

WEB SALES

Online retailers are again expected to take a large share of holiday shoppers spending money, with Amazon.com Inc leading the pack.

"E-commerce in the United States is growing at about 14-to-15 percent, while brick and mortar sales are up about 7 percent," said Rahul Sharma, managing director of investment management firm Neev Capital based in London and New Delhi.

In the third quarter, total sales at Amazon grew 44 percent and analysts say the outlook going forward is rosy, largely because the company's low-priced tablet, the Kindle Fire, is expected to be among the hottest selling items this year.

"Amazon offers just about everything under the sun...there's a reduced shipping cost," said Robert Pavlik, chief market strategist at New York-based Banyan Partners LLC. "With the new Kindle line, people are going to be exploring buying a tablet that maybe might have been out of their budget in the past."

Tablet leader Apple Inc is also going to stay a winner as the new iPhone sells well along with the iPad, said Matt McCall, president of Penn Financial Group and editor of The ETF Bulletin.

"The recent news surrounding the stock has brought the price back down to very attractive levels for investors," he said, referring to a drop in stock prices after the company's rare miss in its most recent quarterly earnings.

COURIERS

In the third quarter, 74 percent of all U.S. Internet users conducted at least one purchase online, according to online data tracking service comScore Inc, buoying shipment volumes at courier companies such as FedEx Corp and rival United Parcel Service Inc.

ComScore expects online sales in the months of November and December to be around $37 billion to $38 billion this year. And, of course, purchases made online must be shipped to their destination.

"FedEx and UPS are well positioned to capitalize on that," said Kevin Sterling, senior vice president of BB&T Capital Markets in Richmond, Virginia.

In October, FedEx said it expected a 12 percent jump in holiday shipments this year. It expects to handle a record volume of packages, driven by online shoppers, and will add about 20,000 workers to handle the rising demand. Rival UPS said this month it plans to hire 55,000 seasonal workers to handle the extra holiday-related business it expects.

Sterling predicts the two shippers could see package volume nearly double from typical volume during the peak of the selling season.

"I have a price target of $90 on Fedex and $85 on UPS," Sterling said. The two now trade at about $82 and $71 per share, respectively.

Sterling views FedEx and UPS as two bellwethers of economic activity. He said that as their business picks up, and people "people start feeling better about the economy... we could see price appreciation."

LAP OF LUXURY

Among traditional retailers, those catering to the well-heeled will do better than others, said New York-based Standard & Poor's senior index analyst Howard Silverblatt, who picked out Tiffany & Co and upscale handbag maker Coach Inc as potential winners.

The jeweler raised its full-year profit outlook in August, as consumers barely flinched at its price increases, while Coach expects sales gains during the holiday season as it ropes in new clients.

"I like Tiffany, Ralph Lauren Corp, Nordstrom Inc and Williams-Sonoma Inc -- companies that have mid- to high-end shoppers and some kind of unique products because that is what will give them pricing power," said Neev Capital's Rahul Sharma, adding that the companies are also benefiting from industry consolidation as weaker players have gone under.

Penn Financial's McCall said bootmaker UGG's parent firm, Deckers Outdoor Corp, is another holiday play. He said a recent pullback in the share price after strong earnings offers investors a chance "to ride the sheepskin boot craze."

Companies that cater to shoppers seeking value might also be strong plays. Among them, McCall said the stock of off-price fashion retailer Ross Stores Inc is cheaper than its peers, making it a good buy in the run-up to the holidays.

Powershares Dynamic Retail ETF, up 9.87 percent this year, holds a mix of retailers, with about 5.4 percent of assets in Coach and about 3 percent in Ross.

(Additional reporting by Sam Forgione in New York. Editing by Bernadette Baum and Jennifer Merritt)

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