Zacks Analyst Interview Highlights: Kroger, Safeway, Cost Plus and Overstock.com

Business Wire, Oct 27, 2008

CHICAGO -- Zacks.com releases the latest Analyst Interview. Today's interview is with senior analyst Rob Plaza, who discusses Kroger (NYSE: KR), Safeway (NYSE: SWY), Cost Plus (Nasdaq: CPWM) and Overstock.com (Nasdaq: OSTK).

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Do you see any opportunities at all [in retail, near-term]?

The S&P Retail Index [RLX] is down over 30% in the last month, due to the credit crisis and worsening retail sales. Given the speed and severity of the decline in stock prices, the RLX is poised for a trading rally that could last a few days or weeks. We saw a similar rally in retail stocks off the July lows, when the RLX jumped 30% in 39 trading days. In this scenario, retail stocks across the board should spike higher.

For those looking for longer-term exposure to the retailers, the more defensive plays should outperform. These include mass merchants and grocers. We have Buy ratings on Kroger (NYSE: KR) and Safeway (NYSE: SWY). The stocks are down in the last month, even though sales at these stores should hold up better than in other areas of retail as consumers tighten their belts.

What about areas where you feel investors should steer clear?

An overlooked but important consequence of this de-leveraging process is that consumer attitudes toward spending are changing. Being forced to increase savings and pay down debt, consumers have become more frugal in their shopping habits. This includes trading down from more expensive retailers to discount stores, foregoing brand name products for private labels, and rejecting the urge to "keep up with the Joneses."

And with unemployment rising and economic growth slowing, consumers will continue to tighten their belts throughout 2009. This will cause retailers to retrench further next year by closing stores, reducing inventory levels and looking for additional ways to cut costs.

During this cycle, the weaker retailers with stores that are too narrowly focused, poorly-run, or rely on the credit markets to operate will not make it. We would avoid retailers such as Cost Plus (Nasdaq: CPWM) and Overstock.com (Nasdaq: OSTK) that were unprofitable when consumer spending trends were much stronger than they are today.

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