Why Retail Stocks Popped Today

What happened

Retail stocks were up broadly today as department store chains and big-box stores continued to rally on bullish reports on the holiday weekend and key selling days like Black Friday and Cyber Monday.

Among the winners today were Nordstrom (NYSE: JWN), which was up 5.1%; Macy's (NYSE: M), which gained 5.5%; Kohl's (NYSE: KSS), up 3.5%; Sears Holdings (NASDAQ: SHLD), which rose 6%; and Target (NYSE: TGT), which was up 5.5%.

The stocks started surging yesterday afternoon, building on upbeat reports as Macy's has looked particularly strong, with its shares up 14% in the last week.

So what

A number of outlets reported solid traffic and sales on Black Friday and Cyber Monday. According to analysts at Wells Fargo, traffic declines on the shopping holiday were the smallest since 2013 and fewer items were marked down significantly.

ShopperTrak found that in-person visits fell 1.6% last Thursday and Friday, but online sales jumped 18%, reflecting a broader trend in retail as brick-and-mortar stores focus on e-commerce to prop up sales. While Macy's experienced a credit card glitch on Black Friday that may have pressured sales, the stock was helped by optimistic comments by CEO Jeff Gennette, who said that holiday sales were off to a good start and that seasonal garments like coats, boots, and sweaters were all trending well.

Low expectations also seem to be aiding retail stocks as the sector has fallen so sharply this year that a modest recovery can take place on just a whiff of good news. The recent round of earnings reports was also better than expected as Macy's jumped double digits on its earnings report earlier this month. Sears, meanwhile, was trading near all-time lows before the recent bounce.

Predictions that Black Friday is dead, which have become popular lately, also appear to be premature as more than half of Americans went shopping over the weekend. According to the National Retail Federation, 174 million people went shopping over the weekend, more than the 164 million the agency had projected. The NRF reiterated its projection for retail sales to grow 3.6% to 4%, and noted that favorable weather may have helped holiday sales over the weekend.

Now what

In many ways, retailers are primed for a blowout holiday season. Consumer confidence is at highs not seen since 2000. The stock market is also at an all-time high, unemployment and gas prices are low, and there's an extra weekend for holiday shopping due to the early Thanksgiving. Unless there's terrible weather in December, retailers essentially have no excuse for not executing in the key shopping season.

Just as Black Friday traffic was better than expected and Cyber Monday sales hit a record $6.6 billion, investors seem to be optimistic that the holiday shopping season as a whole will top expectations. After a wave of store closures and adjustments to improve online selling platforms, brick-and-mortar retailers' prospects should be improved. While pressure from Amazon and other online channels remains, many retailers, like Nordstrom and Kohl's, have been able to avoid falling profits in spite of the upheaval. The need for stores isn't going away. Instead, what may be taking place is a right-sizing of the brick-and-mortar industry, which needs to find an equilibrium point.

Brick-and-mortar retailers will need to continue to adapt as e-commerce becomes even more convenient, but the stocks have gotten so cheap that a pop like today's isn't surprising. While I wouldn't rush back into retail stocks as structural problems still remain and the shakeout continues, these stocks will surge again if holiday numbers exceed expectations.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.