Why You Should Shop Carefully for Retail Stocks

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Retail stocks surged Thursday, as June same-store sales sparked investor euphoria. The jump probably stood out even more sharply against a still-tough economy for many U.S. consumers. However, if this sudden elation has you thinking about snapping up retail shares yourself, make sure you shop with more than a little caution.

The Scoop on Same-Store-Sales
Same-store sales -- also known as comparable-store sales, or "comps" for short -- are a very closely watched retail metric. Comps track sales growth in retailers' stores open for at least a year, helping investors gauge the success of a retailer's brand. Some retailers report this figure monthly, giving investors the most informational bang for their buck, while others report the figure quarterly.

Either way, investors should always weigh the data carefully, taking it with a grain of salt and a heaping shovelful of historical context.

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June's same-store sales included several major retail victories, including Costco's (COST) 8% surge. For a little of that historical context I mentioned, Costco's comps increased 4% last June; thus, its gain this time around doesn't simply owe to an easy comparison with a lousy month last year. The warehouse chain keeps piling on increased sales and consumer traffic, testifying to this company's brand strength and customer loyalty.

One of the most impressive June same-store sales gains came from Limited Brands (LTD), the name behind Victoria's Secret and Bath and Body Works. (Ironically, the company's no longer associated with its former namesake, the mall-based store The Limited.) Limited's June comps increased by 12%, which is quite impressive compared to its 6% increase in same-store sales last June.

On the other hand, struggling Gap's (GPS) same-store sales nudged up 1% in June. Last June, Gap's comps stayed flat compared to a 10% decrease in June 2009. In this case, same-store sales tell us that Gap may be slowly improving -- but it's not really back.

Don't Get Sucked Into Making an Uninformed Impulse Purchase
June retail sales looked pretty heartening, but one good month's comps data doesn't tell the whole story. Digging in for historical same-store sales information, including sales and earnings over time, creates a far better picture of a company's success.

In other words, avoid those impulse purchases when other investors get caught up in the moment. Just like the most successful shopping trips, taking the time and doing the research can help you pick the best stocks at the best prices.


Motley Fool analyst Alyce Lomax owns no shares of any of the companies mentioned. The Motley Fool owns shares of Gap, Limited Brands, and Costco Wholesale.
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