US tips: retailers bucking the downtrend

It seems that a combination of higher energy and raw materials costs and the hurricane season are beginning to take their toll on US spending habits: Standard & Poor's expects retail sales in the pre-Christmas period will rise by only 3.5%-4.0%, compared with the 6.7% recorded in 2004.

As consumption accounts for two-thirds of America's GDP, this means that the spotlight is on the consumer as never before, says Jennifer Ablan on Barrons.com, but also that investors should approach the retail sector with some caution.

One of the best ways to do this might be only to invest in firms "with something special to sell". Cases in point are Abercrombie & Fitch (ANF, $63.69), which has become "the store of the moment for the 14-to-18 crowd", with its "lower-priced, surf-inspired fashions", and Ann Taylor Stores (ANN, $33.44). Ann "has scored with the Celebration collection of five dresses", the styling of which is "attractive and well suited to the division's core customers", according to industry analyst, Jennifer Black. Abercrombie shares trade on a 2005 multiple of 18.3 times, despite boasting like-for-like sales growth averaging 20% since September 2004. That seems reasonable. But Ann Taylor, on a p/e of 28.1 times, might be only for the very bullish.

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Other potential investment targets identified in a BusinessWeek online search by Michael Kaye, which screened for retailers with a market cap above $500m that "have posted year-over-year increases in both sales and net profit for each of the past five years", were Bed Bath & Beyond (BBBY, $41.99), Big 5 Sporting Goods (BGFV, $23.63), Chico's FAS (CHS, $44.81),, Jos. A. Bank Clothiers (JOSB, $42.27), Michaels Stores (MIK, $37.31) and United Auto Club (UAG, $38.06).

Finally, says Michael Sivy on CNN Money.com, don't forget the world's biggest retailer, Wal-Mart (WMT, $48.08), which is emerging as "one of the season's leaders" with its "renewed focus on the aggressive tactics that have made the chain so successful". Despite trading on a market multiple of just 16.1 times earnings to February 2007, with consensus estimates for earnings growth of 14% a year over the next five years, it easily surpasses "the basic hurdle" of growth stocks of being able to generate "above-average total returns". A "bargain", agrees Breakingviews.com.