Retailers See a Ray of Hope Ahead of Holidays

Retailers See a Ray of Hope Ahead of Holidays

The Dow Jones Industrial Average slid 0.47% in late trading after minutes from the Federal Reserve's October meeting hinted at slowing bond purchases within the next few months. Improving economic data has given Fed members confidence that some stimulus programs can be pulled back in the near future. One data point that might help today was a 0.4% rise in retail sales in October, which was above expectations for a flat month. Versus a year ago, retail sales were up a healthy 3.9%.

This holiday season is expected to be pretty abysmal, but there are a few positive items to point at. Gas Buddy reports the cost of gasoline is down to $3.21 per gallon, $0.24 below its price a year ago. The unemployment rate is also down to 7.3%, below the 7.9% mark of a year ago. This means that more people have jobs and they're probably spending less money at the pump. But where are they spending it?

Not all retailers are worth buying
Before jumping into retail stocks on a single data point, we should also consider just where those shopper dollars are going. Wal-Mart just reported a 0.1% decline in same-store sales last quarter, while Best Buy's same-store sales were up 1.7%, helped by the closure of underperforming locations. Target reports third-quarter earnings tomorrow, but second-quarter same-store sales were only up 1.7%.

You'll notice that each of these major retailers is growing much slower than retail as a whole. The reason is increased competition from online competitors, which may be the real winners this holiday season.

The king of online retail
The elephant in the room this holiday season is . The e-commerce king has always been a thorn in the side of brick-and-mortar retailers, but with $70.1 billion in sales in the last year it's now taking a sizable chunk out of those businesses.

Amazon grew revenue 24% last quarter. For every dollar it grows in online sales it's money away from Wal-Mart, Target, or maybe Best Buy. Retail is a zero-sum game, and if Amazon is growing it means everyone else isn't.

A growing pie with smaller slices
The retail pie appears to be growing at a healthy rate. But that doesn't mean it will be a happy holidays for everyone in the space. I think Wal-Mart, Best Buy, and Target will grow slower than retail sales as a whole.

The culprit behind weak brick-and-mortar sales is Amazon and other online retailers. Simply put, they can offer a broader selection at lower prices. And now that Amazon is nearly as big as Target it's taking a significant bite out of even the biggest rivals.

Who should you be investing in?
Bullish on retail but don't know which company to go with? To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

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Travis Hoium is short shares of The Motley Fool recommends The Motley Fool owns shares of Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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