Bling, sports apparel, electronics and plastic gift cards are expected to be the most desirable presents in this cautious 2010 holiday shopping season.

Investors must determine if favored gifts will translate into strong performances of the stocks of retailers that sell them.

"Cuff Love" is how J. Crew is promoting its bracelet line. It and apparel retailers such as Chico's, Ann Taylor and Banana Republic are allocating increased floor space to jewelry and accessories. For consumers, jewelry is a relatively inexpensive way to update a wardrobe, while for retailers it represents higher profit margins and inventory that's easy to replenish.

"Consumers seem excited by jewelry and accessories this year, which plays well into prospects of J. Crew (JCG) and Coach (COH)," said Marie Driscoll, retail analyst with Standard & Poor's Corp., New York. "Tiffany (TIF) should also do well with its new handbag line because people have returned to firmly-rooted luxury brands."

With the National Retail Federation predicting holiday sales will increase a modest 2.3 percent over last year, retailers are obsessed with inventory control in order to avoid the severe discounting of the past two years. They're trying to find new twists on items that can help shoppers overcome their recession mindset.

"It will be an OK Christmas season, not gangbusters, but that's OK," said Driscoll. "By comparison, the 2008 season was a nightmare and people were freaked out, while last year was a little bit better with sales up modestly."

According to a consumer survey by the National Retail Federation, 57 percent of those responding said they'd like a plastic gift card more than any other present.

"We expect a modest improvement in holiday sales this year compared to the last two years," said Zoe Tan, retailing equity analyst with Morningstar Inc., Chicago. "The retailer that can offer the consumer something a little different and unique--but affordable--will do better than others."

While there will be promotions to drive consumers into stores, these will be planned promotions in which the retailers know in advance how they will be discounting their goods, Tan said. They shouldn't result in a negative hit to the bottom line.

Strong holiday athletic apparel sales will benefit Nike Inc. (NKE), Under Armour Inc. (UA) and Lululemon Athletic Inc. (LULU), Tan predicted. It is another category in which shoppers have considerable flexibility on how much to spend.

"The holiday mood is cautious for most consumers because, even though we're not seeing wide-scale layoffs, the hiring is still pretty weak at this point," said Scott Brown, chief economist for Raymond James & Associates in St. Petersburg, Fla. "Another worry is the housing sector, which won't recover until we get much better job growth."

Investors need to monitor the stocks of retailers carefully because stores go in and out of favor and it's not enough to simply like a company's products or service personally. Those with financial staying power stand out.

For example, J. Crew Group Inc., with more than 300 retail and outlet stores in the U.S., is a stock recommended by Driscoll. That trendy retailer also sells its apparel through a widely-distributed catalog and on the Web, with the catalog providing demographic information and helping to identify markets for new stores.

Promoting "The Most Smart Phones Under One Roof" this holiday season is Best Buy Co. Inc. (BBY), largest U.S. consumer electronics retailer with nearly 20 percent of the market. Its stock is recommended by Tan.

From phones to games to computers, Best Buy has efficient inventory control of products expected to be popular. Its Rewards Zone loyalty program provides a strong ongoing connection with customers. Best Buy also has the Magnolia, Pacific Sales and Geek Squad businesses and operates stores under different names in Canada and China.

Those who proclaimed the death of department stores were premature in their assessment. Some will prosper this holiday season.

"Macy's (M) and J.C. Penney (JCP) are going to stand out this year because they are going to have great promotional ideas and good inventory control," believes Driscoll. "Meanwhile, specialty stories such as Coach and Polo Ralph Lauren (RL) will do well on the wholesale end--the goods that they sell in department stores--as well as in their own stores."

Finding a niche is crucial.

Limited Brands Inc. (LTD), whose stores include Victoria's Secret, Bath & Body Works, White Barn Candle Co., C.O. Bigelow, La Senza, Pink and Henri Bendel, is a Tan recommendation. It sells merchandise through catalogs, online and 3,000 retail outlets. Holding more than 25 percent of the intimate apparel market, Limited Brands has been upgrading its technology and has great international potential.

"Urban Outfitters (URBN) caters to a niche group--teens and young adults--and has been able to turn out new and interesting products throughout the season," said Tan. "We think it will outperform this holiday season, as well."

Online sales are growing rapidly each year. A National Retail Federation survey found that nearly two-thirds of retailers expect their holiday online revenue to increase by at least 15 percent compared to last year.

"Make a list, check it twice, click to give and wrap up holiday shopping in no time," is how Macy's has been promoting its online sales.

 

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(c) 2010 Andrew Leckey