Retail Stocks You Can't Afford to Ignore in the Second Half of 2012

This article is part of the Fool's Halfway Through 2012 series, in which we review how sectors have done since January and see what's coming for the rest of the year. Click here to read all of the articles.

It has so far been a transformative year for the retail industry. With e-commerce sites such as Amazon (NAS: AMZN) and eBay (NAS: EBAY) undermining bricks-and-mortar establishments, merchants have to rethink their store strategies if they want to remain competitive.

Having now passed the midpoint of 2012, let's review how retailers fared during the first half of the year and where they're headed in the second half. I'll also highlight retail trends that are driving the industry, as well as what stocks investors should keep watch on as we round out the year.

Consider this
Because consumer spending accounts for about two-thirds of GDP, downward trends in gross domestic product often signal a slowdown in the retail sector. Consumer confidence and monthly retail sales are other indicators that can help investors better understand the overall health of the industry, as well as the U.S. economy at large. Ultimately, economic considerations such as these play a key role in deciding the fortunes of retailers.

Luckily, retail stocks got off to a fast start this year with the S&P Retail Index posting first-quarter gains of 18% -- topping both the Dow Jones and S&P 500 during that time. Meanwhile, March was an especially upbeat month for Target and Macy's, as the stores led the retail group higher with stronger-than-expected sales.

In fact, research firm Retail Sails showed that for the month of March total net sales climbed 6% from the same period a year ago. Same-store-sales also spiked higher that month thanks in part to the early arrival of Easter and unseasonably warm weather.

However, climbing gas prices followed, which quickly ate into consumer discretionary spending. As a result, many department stores floundered. However, companies that also sell gas, such as Costco and Wal-Mart, were able to grab gains.

From bricks to clicks
Unfortunately, economic uncertainty isn't the only challenge facing retailers. Today, big-box stores are also feeling the added pressure of a more connected consumer. Armed with smartphones, shoppers have instant access to pricing information, product reviews, and much more.

But before we start throwing around buzzwords like "showrooming", let's look at the two companies that have been most affected by this type of disruption. Best Buy (NYS: BBY) won't be the world's largest electronics retailer by revenue much longer if it doesn't make some dramatic changes to its retail strategy.

Attempts by management to refocus Best Buy's business have yet to gain traction. In the past seven months, the big-box store bid farewell to longtime CEO Brian Dunn, revamped its brand offerings to include stand-alone Best Buy Mobile stores, and toyed with the idea of being taken private. Today, shares of Best Buy continue to underperform industry peers, as you can see in the chart below.

BBY Chart
BBY Chart

BBY data by YCharts

Barnes & Noble (NYS: BKS) is another bricks-and-mortar company quickly losing ground to e-tailers like Amazon and eBay. Barnes & Noble is clinging to a dying business model. Earlier this year the bookstore chain introduced its updated line of Nook e-readers to better compete with Amazon's Kindle devices. However, the company's Nook still lacked the media ecosystem that made competing tablets and digital content readers a success.

Amazon's recent decision to move into same-day delivery could be the nail in the coffin for these retailers. With the end of 2012 now in sight, both Best Buy and Barnes & Noble need to focus on cost-cutting initiatives and product differentiation if they want to keep customers in their stores.

Playing the future
So what stocks should investors keep an eye on as we round out the year? Companies with recognizable brands and legions of loyal customers are one place to start. Some examples include lululemon athletica (NAS: LULU) on the high-end and discounter Target on the lower end.

I think international growth and new product categories will help the yoga apparel company finish fiscal 2012 on a high note, despite Lululemon having posted a weak forecast for its current quarter. Target, on the other hand, is getting ahead with smart initiatives like exclusive merchandise and limited-edition collections from upmarket designers.

Target is teaming up with upscale department store Neiman Marcus to create a special holiday collection. The assortment will include more than 50 products and be available at Target and Neiman Marcus stores around the country starting Dec. 1.

The trick for any retailer is delivering something the market wants -- a winning trait that both Lululemon and Target possess. Overall, I suspect retail stocks will finish the year slightly ahead of the broader market. That said, the current economy is playing more to the strengths of discount retailers, which is why I particularly like names like Target, Kohl's, and Amazon as we move toward 2013.

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This article is part of the Fool's Halfway Through 2012 series, in which we review how sectors have done since January and see what's coming for the rest of the year. Click here to read all of the articles.

The article Retail Stocks You Can't Afford to Ignore in the Second Half of 2012 originally appeared on

Fool contributor Tamara Rutter owns shares of Target, Lululemon, and Follow her on Twitter, where she uses the handle @TamaraRutter, for more Foolish insights and investing advice. The Motley Fool owns shares of Lululemon,, Best Buy, and Costco Wholesale. Motley Fool newsletter services have recommended buying shares of, eBay, Lululemon, and Costco Wholesale. Motley Fool newsletter services have also recommended creating a bull call spread position in Wal-Mart Stores and writing puts on Barnes & Noble. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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