Perhaps Retail Isn't Dead Yet

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Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis

U.S. stocks opened slightly higher this morning, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average up 0.08% and 0.21%, respectively, at 10:05 a.m. EDT.

Last Friday, I explained why retail's ugly series of earnings reports was the week's most important trend, but this week appears to be offering something of a counterpoint to that observation.

On the face of it, J.C. Penney's results were nothing to write home about. Same-store sales at the ailing retailer fell 11.9% in the quarter, versus the 7.4% Wall Street analysts had forecast (same-store sales refer to revenue from stores open at least one year in order to establish a like-for-like basis for comparison).

Excluding items, Penney lost $1.17 per share, falling $0.11 short of Wall Street's consensus estimate. However, the company described the back-to-school season as "encouraging." Investors approve, sending the shares up 1.7%.

Meanwhile, electronics retailer Best Buy recorded its first profitable quarter in a year and blew past expectations in the process, with profit of $0.32 per share (ex-items) easily topping the $0.12 per-share consensus forecast. The market is certainly showing its appreciation this morning, with Best Buy shares up 10%.

The company's turnaround is clearly gaining traction, but the improvement in operating results owes largely to better cost controls, while growth remains elusive: Total revenue fell 0.4% year on year, with sales at U.S. stores open at least 14 months suffering the same percentage drop (globally, the equivalent decline was 0.6%).

In terms of quality of results, though, today's unqualified winner is Home Depot . Yes, the margin of its "beat" was smaller than Best Buy's, as the home improvement retailer earned $1.24 per share versus a consensus estimate of $1.21. Yet it was achieved on revenue growth of 9.5% and same-store sales growth of 10.7% -- significantly faster than the growth rate of the economy during that period. The company even had the chutzpah to raise its guidance for the year by $0.08 to $3.60. If that isn't evidence that the housing market -- a key contributor to the economy -- has turned a corner, then it has me fooled.

Downbeat data alternating with better data, and vice versa -- that's the story of the post-crisis recovery. Today's series of retail earnings are certainly an improvement over last week's, but they still highlight (for the most part) that growth remains a challenge. That owes partly to a secular shift in shopping habits, but muted growth is still a reality in this economic environment.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only the most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the "3 Companies Ready to Rule Retail" in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

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