One Retailer To Buy On Black Friday

Happy Black Friday – it’s the craziest shopping day of the year.  So let’s take a look at how things are shaping up in the retail sector… And, I’ll give you my favorite stock.

First things first, let’s look at the SPDR S&P Retail ETF (XRT) as a proxy for the sector.

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The first thing that jumps off the chart at you is how badly the sector was punished in the market crash of ’08.  (You’d think their balance sheets were loaded with the same derivatives as the financials.)  The ETF lost 67% of its value, falling from $45.51 in May ’07 to $14.81 in November ’08.

From there, XRT has staged a magnificent rally.  The chart below is worth a thousand words.  You can see the trend line since March is providing strong support.  The retail industry has recently pulled back to this trend line.  (If you like to buy dips and sell the rips, this is a good buying opportunity.)


XRT has managed to regain about 75% of the losses from its peak in ’07. So the question becomes, how much further can the sector go?

It comes down to consumer spending.

There are always two sides to every argument.  And the debate over how much consumers will spend post-credit bubble is no different.

The argument against a strong economic recovery is the same old story. Consumers can’t, or won’t, spend enough to be the growth engine they’ve been for decades.

Some experts point to high levels of household debt.  They contend it will take years to bring the debt levels down to a manageable number.

But I disagree.

I think the consumer will adjust to the new rules quickly.  We’re already seeing the consumer shift from a “buy now, pay later” mentality to a “save now, buy later” mindset.

And it’s happening much faster than anyone thought.

American consumers are shedding debt at a record pace.  It seems to surprise economists every month.  That’s a good sign for the retail industry.

I think the consumer is going to come out of this crisis much better off. It’s basically force-feeding a shift away from credit card dependency.  It will hurt sales in the short run.  But in the long run, consumers will have more money to spend on stuff.

Here’s why.

The monkey on consumers' backs is interest payments on credit card balances.  But once consumers have paid down debt and put away some savings, they aren’t going to continue to save, save, save.

They’ll use their savings to buy stuff.  It’s the American way after all.  And they’ll be able to do it without a credit card tacking on 20% interest.

Big picture, this is a very good thing for retailers and consumers.  And wealthy consumers without the burden of credit card debt are going to be the first to open their wallets.

We’re already seeing signs of increased spending by these consumers.  The credit card of choice for the wealthy is American Express (AXP). And they recently reported spending volumes are rising.

Clearly, wealthier Americans are loosening their purse strings.

One high end clothing retailer is well positioned to profit from this trend. Take a look at fashion specialty retailer, Nordstrom (JWN).  They recently increased their earnings outlook for their fiscal year 2009.

Now they’re expecting between $1.83 and $1.88 per share.  That puts them at a forward PE of 18.5, well below the average for the industry.  And they paid a dividend of $0.16 per share this quarter.

Nordstrom’s is a very well run company generating above average returns.  And, they should continue gaining market share, growing earnings, and paying a nice dividend.

If you’re looking to get a great deal on Black Friday, Nordstrom looks like a bargain to me. 

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