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Mass retail stock trends are mixed.

NEW YORK -- The performance of mass retail stocks was uneven in February, while the overall market fell sharply as fears of the potential negative impact of an economic recession reverberated among investors.

During the period from January 31 to February 29 the MMR discount chain index fell by 3% to close at 3,124.6. During February the MMR supermarket index dipped by 4.9% to close at 842.5, and MMR's chain drug index gained 3.8% to finish at 2,649.1. By comparison, the Dow Jones industrial average decreased by 3%.

The investment newsletter Dow Theory Forecasts indicates that it expects slow sales growth for retailers in 2008, because consumers have become less willing to spend.

Nevertheless, the newsletter recommends three retail stocks and considers two of them--Wal-Mart and Walgreens--to be "long-term buys," since both are in a less economically sensitive position than most retailers. The third recommended retail stock is Nordstrom, which targets upscale customers, who have historically been less likely to cut back on spending during rough periods.

It is time to look again at the growth stocks of the 1990s, since some of them--including Wal-Mart--have become good values today, maintains Brian Gilmartin, portfolio manager at Trinity Asset Management.

"The stimulus package [via tax refunds] will help the Wal-Marts of the world, combined with the company looking to shrink growth in the U.S. store base to take some of the heat off the income and cash flow statement," he says. "With $330 billion in annual sales, the company can't insulate itself from a severe pullback in consumer spending, but its aggressive expense control and margin management means that the juggernaut can adjust to the changing economy very rapidly."

Citigroup retailing analyst Deborah Weinswig has raised her price target on Wal-Mart and says the world's largest retailer has been making positive changes to merchandise, which will boost sales and margins this year.

She notes that Wal-Mart has made strides in improving consumer electronics, apparel and certain home items.

In electronics, for example, Weinswig points out that stores now offer customers the chance to browse in a department that is spacious, full of diverse brands and free of clutter.

"We are impressed with the merchandising improvements made in electronics, such as improved aesthetics, ... and believe it demonstrates management's ability to drive results," she writes in a note to clients. "We expect that initiatives in apparel and home will begin to materialize in sales and gross margin results in 2008."

In late February analysts reported that TJX was a good defensive stock pick for the uncertain consumer environment as consumers trade down amid an uncertain economy. Banc of America Securities analyst Dana Cohen notes that TJX was one of the few companies that did not lower guidance during the most recent quarter.

Consumers have begun to cut spending amid weak housing and credit markets and rising food and gas prices. TJX--which operates off-price stores, including T.J. Maxx and Marshalls --and other discounters have fared better than many mall retailers, who have recorded declining sales as consumers seek out deals.

"TJX continues to be a defensive play in a soft macro[-economic environment], given its off-price positioning," Cohen writes. She rates TJX a "buy."

In late February Sears Holdings reported sharply lower earnings, and analysts are skeptical about how quickly company chairman Edward Lampert will be able to execute a meaningful turnaround.

"The longer-term outlook remains challenging [for Sears] as we haven't seen tangible evidence of an 'Act II' or a top-line turnaround taking shape," states Goldman Sachs & Co. analyst Adrianne Shapira, who has a "sell" rating on Sears.
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Title Annotation:MONEY
Date:Mar 24, 2008
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