A Holiday To Forget For Retail Stocks, ETFs

In a post-holiday funk, you took down the tree, threw out the mistletoe and started worrying about your retail investments after a slow shopping season.

But hold on. The holiday season isn't over. And it might not be as gloomy as you think.

Consumer worries about the economy and tightening credit seemed to keep holiday spending below last year's level. Because the November-December holiday period accounts for 25% of the year's sales, that could mean lower overall sales.

Retailers with an international presence seem to be especially hurting. Across the pond, debt-ridden U.K. consumers delivered one of the worst holiday sales seasons ever.

Retail exchange traded funds echoed the slump. Two of the bigger retail ETFs, the 11/2-year-old SPDR S&P Retail (AMEX:XRT - News) and the 2-year-old PowerShares Dynamic Retail (AMEX:PMR - News), hold an IBD Relative Strength Rating of just 28. Both fell more than 15% year to date.

Most Stocks Down

The funds count some of retail's heaviest hitters among their holdings -- and their results weren't pretty. Among the 58 retailers in the SPDR Retail fund, only Urban Outfitters (NasdaqGS:URBN - News), the second largest holding, showed a year-to-date gain -- and that wasn't even half a percent. Of the 30 holdings in the PowerShares retail fund, three showed a gain. Gap (NYSE:GPS - News), held by both funds, had one of the bigger falls, at nearly 5%.

Some analysts say projected holiday sales increases of 3.5% might still happen. What? How?

Gift cards. Standard & Poor's equity researchers said Wednesday they believe post-holiday gift-card redemptions will give retailers the hoped-for sales boost.

An S&P survey in November showed more than half of the 1,100 shoppers polled by InsightExpress planned to give gift cards this year. Four out of five of those surveyed said they'd spend the same or more on cards as they did in 2006, when gift cards were 32% of total holiday spending.

The big test is happening now. Retailers expect some 25% of gift-card redemptions to take place during the week following Christmas. More than two thirds of the cards will likely be redeemed by January's end.

Still Optimistic

Retailers are optimistic that all's not lost. Some have put out fresh merchandise at full price, while others are slashing prices by as much as 70% to move product and bump up sales.

HOLDRs Retail (AMEX:RTH - News) reflects some of that optimism. With 18 holdings -- all of them large chains such as Home Depot (NYSE:HD - News), Target (NYSE:TGT - News) and Kohl's (NYSE:KSS - News) -- the fund has a 47 RS. More than 80% of the fund's holdings are in its top 10.

Amazon (NasdaqGS:AMZN - News) especially helped keep the fund floating. It was the only one of the fund's holdings that showed a gain for the year.