Growing Consumer Spending and Retail Stocks

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Well, color me – and everyone else in the news business – surprised. According to numbers released today  retail spending was up for January over a year ago. This after pretty much every talking head thought the decrease in take home pay due to the expiration of the payroll tax cut would lead to less consumer spending. Huh.

The most likely reason for the continued strong spending is an improving economy and growing security on the part of workers that they'll keep their jobs. Nothing makes people not spend like a lack of job security. Except maybe a lack of a job, I'd guess.

Still, even though I've been confident that the American economy is on the way to a strong year, it's good to get the occasional fact that reinforces that notion. While I'm not much a one to shop at higher-end retailers the fact that people are doing so can only lead to a greater and faster recovery. The more people spend, the more people have jobs and therefore the more people are around who CAN spend. It's a great thing to see when it gets humming. I'd like us to get there by 2014 at the latest.

Anyway, some of the stores announcing retail sales numbers today were downright giddy about it. Here are my thoughts on some of them.

Macy's (NYSE: M)

Around long enough that it has a one letter ticker symbol, Macy's is one of the grandparents of large department stores. Macy's had a particularly fun year, seeing same-store sales up 11.7% from January to January. No one I know will be able to argue with success like that. The firm must have seen good times coming as it authorized $1.861 billion worth of share repurchases just a few months ago. The stock can be a bit confusing. Like a lot of equities it saw a summer trough last year but it's come back to gain almost 20% since mid-July. It also pays a 1.99% dividend. I like it. This is a big retailer you should have in your portfolio. It made seem old and stodgy, but that just means it's proven itself over time.

Nordstrom (NYSE: JWN)

Again with the summer drop. Nordstrom started last year at $51.01 and closed today at $55.11. It was the time between that makes ulcers. Nordstrom dropped as far as $46.27 and on that basis is up about 15-20% in seven months. It's another sign that things look good for the economy and retail in general. The chain saw an 11.4% same-store sales gain in the last year. That's a bit less than Macy's but still a win in a world where the inflation rate is 1.7% for 2012. Heck, the company's dividend is higher than that at 1.97% yield. The company isn't only high-end, though. It's Nordstrom Rack also let it profit from harder times where customers are looking to save money. It's a smart company that knows how to appeal to its audience.

Kohl's (NYSE: KSS)

Another good reporter of same-store sales, Kohl's saw its numbers grow 13.3% year over year. Even with that the news is extremely mixed on Kohl's. Citigroup downgraded it to 'neutral' and says that it faces difficulties in completing a turnaround. This complexity is reflected in this year's stock performance. This is the first one I've covered on this list that's down for the year. A year ago it was at $50.14 it closed today at $45.81. One good thing about the lower price, though, it makes the yield on its dividend climb to a column-best 2.79%. Cold comfort, I know. This is the one I'd avoid if at all possible. Very risky money could go here, but not any money you're going to need to count on in the future.

Target (NYSE: TGT)

Target is always and interesting company to look at … and one of my personal favorites. The store has tried to define a 21st century space with discounted pricing. It's not Wal-Mart, but it's not a pricier department store, either. I like the concept. Target only saw a same-store growth of 3%, according to the numbers. That's not as flashy as Macy's or Nordstrom but I'll still take it because of everything else that makes the firm a good buy. Its stock has been good all year, avoiding the summer slump that the others went through. Overall it climbed about 20% over the year, from $52.57 to $62.30 now. Other analysts are high on TGT and I think you should be, too. The firm even raised its dividend by 20% over during the year. This is going places.

Get me, here: retail stocks are always going to be vulnerable to outside forces. Recessions hammer them as do natural disasters and such. Anything that really takes away from the disposable income stream of consumers can hammer retail stocks, especially high-end retailers. But I think today's data, combined with a pretty positive long-term economic outlook, means it's time to get back into retail in a big way.

Good luck!

Follow Nate on Twitter: @natewooley

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