The choppy economy around the world in 2011 was more or less evident in every sector. Retailers were also not left unscathed.

Slow moving US and Asian economies and recessionary fears in Europe continued to weigh upon consumer discretionary purchases. Moreover, rising inventory levels and increased markdowns dragged down margins for the retailers.

However, retail, owing to its huge spectrum and scope for growth, has been a lucrative investment avenue for investors. Adding to the opportunity is the strong holiday sales momentum. Most retailers witnessed strong sales throughout the holiday season as shoppers shrugged off their economic woes to mark record holiday sales.

In near term, we expect most of the retailers to post strong top-line results. Thus identifying the future winners and losers from this sector would be a good idea for your investment decision. In fact, this could be the perfect time to add fundamentally strong retail stocks to your portfolio.

What Strategy Should One Follow?

There are some fundamental parameters or metrics to find an investment rationale for retail bigs. Examining sales increases (mirrors company specific and macro-economic positives, and periodic growth), gross margin trends (reflects price premium and sourcing costs), inventory turnover ratio and bottom-line performances could help gain a fair idea about the stocks.

One might debate the above parameters. However, the objective is to simplify the investment strategy through a rational approach.

Click-and-Mortar

Until now, this has been a year of streamlining and assimilating internal process for retailers. The companies concentrated more on aligning inventories, improving efficiency and competence and spending on technology. Moreover, most of the companies have incorporated e-commerce platforms to bring in incremental gains.

So, where do they stand on metrics? Let’s catch up with a few.

Macy’s Inc. (M), one of the leading department store retailers in the U.S., witnessed a year-over-year increase of 5.7% in its top-line results in the first nine months of fiscal 2011 with a 5.3% increase in comparable store sales. Macy’s gross margin contracted 30 basis points during the period to 40.1%.

However, with its operating efficiencies, Macy’s bottom-line results increased approximately three times when compared to the same period last year. Moreover, the company has an inventory turnover ratio of 2.8. Macy’s has a Zacks #1 Rank, which translates into short-term Strong Buy rating.

Target Corporation (TGT”>TGT), the operator of general merchandise and food discount stores in the United States registered a consolidated growth of 4% in its total sales in the last three quarters in 2011. During the nine-month period of fiscal 2011, comparable store sales increased 3.4% compared with a rise of 2% in the year-ago period.

Target Corporation’s bottom-line marked an increase of 10.5% when compared to the same period last year. However, gross margin shrunk 80 basis points to 32.3% versus the same period last year. The company has an inventory turnover ratio of 5.77. Target holds a Zacks #2 Rank, which translates into a short-term Buy rating.

Wal-Mart Stores Inc. (WMT”>WMT) reported a year-over-year growth of 6% in its total sales for the nine-month period, ending October 31, 2011 (last three quarters). The company witnessed an increase of 1.3% in comparable store sales compared with a decline of 0.6% in the same period last year.

The company marked a rise of 8.6% in its bottom-line results in the last three quarters compared with the same period last year. However, Wal-Mart registered a gross margin rate of 24.6% during the period, down 30 basis points with an inventory turnover ratio of 8.38. Wal-Mart’s shares hold a Zacks #3 Rank, which translates into short-term Hold rating.

Sears Holdings Corporation (SHLD”>SHLD) the fourth largest broadline retailer in the U.S., marked a decline of 1.9% in its total sales in the last three quarters with a drop of 2.6% in the comparable store sales, year-to-date. Sluggish top-line growth led to a decrease of 110 basis points in the gross margin rate to 26.1%.

What’s more frustrating is the widening of the loss in its bottom-line results. The company’s loss per share widened more than 3 times when compared to the loss per share in the year-ago period. Sears has an inventory turnover ratio of 3.17. The stock currently holds a Zacks #5 Rank, which translates into short-term Strong Sell rating.

Wrapping Up

Amid lingering economic woes, where stock market remains highly volatile, a diligent use of retail metrics tool would help you in picking right stocks to create wealth.

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