Retail Stocks On Rise This Year, Outpacing Broad Market

Retail stocks have come out of the gate quickly this year as sentiment about the economy has improved, with the optimism pushing many of the shares to highs they haven't seen since before the recession.

Optimism grew stronger Tuesday when February retail sales numbers from the Census Department came in better than expected. Excluding autos, retail sales grew 0.9% last month, after economists had projected a 0.8% rise. Sales at department stores rose 1.5% and apparel sales increased 1.8%.

Investors have been paying attention, sending a number of retail shares to multiyear or all-time highs in recent days. The group includes Costco Wholesale Corp. (COST), Macy's Inc. (M), Dillard's Inc. (DDS), Limited Brands Inc. (LTD) and Zumiez Inc. (ZUMZ).

Stocks that have been swept up in the buying but have not hit new highs include Rue21 Inc. (RUE), Aeropostale Inc. (ARO) and Jos. A. Bank Clothiers Inc. (JOSB). Stocks missing the run-up include Urban Outfitters Inc. (URBN), Williams-Sonoma Inc. (WSM) and Children's Place Retail Stores Inc. (PLCE), all of which had earnings issues.

So far this year, the Standard & Poor's Retail Index is up 15%, compared with the 10% rise by the broader market's Standard & Poor's 500 index.

The gains come amid cross-currents. Although February's strong retail sales are complemented by signs of improving employment, the housing market remains weak and gasoline prices are escalating, which could hobble consumer spending this summer. The conditions raise questions about the longevity of retail stocks' run.

Edward Yruma, retail analyst at KeyBanc Capital Markets, says the stocks have more steam.

"People are shopping more incrementally and that suggests the economy is slowly healing," Yruma said. "The recovery is also more broad-based" as opposed to a year ago, when strength was largely seen on the higher end, Yruma said.

Charles Grom is a retail analyst at Deutsche Bank who covers department stores, discounters and supermarkets, and he said his group is in the midst of its "annual sweet spot," and likely has further room to run. A track record of outpacing the broader market and the solid same-store sales gains, among other factors, will support further upward movement, Grom said.

Kimberly Greenberger, retail analyst at Morgan Stanley, is more cautious as the summer approaches. Greenberger cites a jobs market that isn't yet stable and futures pointing to higher gasoline prices.

Retail stocks may also lack a new catalyst for a while, given that the companies' fourth-quarter earnings period is largely over. It will not be really evident until later in the spring how things went for retailers in the first quarter.

-By Karen Talley, Dow Jones Newswires; 212-416-2196; karen.talley@dowjones.com

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