5/7/2008

April Retail Sales Preview
By Brian Sozzi

April had all of the makings of a bounce back month for the nation's retailers following a largely disappointing March showing.  The industry weathered a convergence of events in March, such as unfavorable weather conditions hampering early spring apparel sales and the negative impact of an early Easter.  In April, weather conditions across the U.S. were conducive to solid sales of spring/summer product offerings, despite the prevalent macroeconomic circumstances.  Also comparisons to last year are extremely favorable given the Easter shift.  In total, however, investors should expect combined March/April comps across most areas of the sector to be negative given soft mall traffic and more cautious spending (note the two-month aggregate is the de facto measurement in assessing sales from March/April).

We expect a continued divergence of trends among retailers, with those offering strong product value equations (Aeropostale, Wal-Mart) outperforming those that sell more discretionary goods (Ann Taylor) and those not being price leaders (Target).

Sector Overviews (from coverage universe; those that report monthly sales)

Specialty Apparel

WSS Ratings (12-month outlook)

American Eagle Outfitters

• Rating: Sell
• Inputs: weakening fundamentals; losing market share

Aeropostale Inc.

• Rating: Buy
• Inputs: gaining market share from trade down consumer; improving assortments; operating momentum in plain sight

Hot Topic Inc.

• Rating: Sell
• Inputs: continues to struggle in driving store traffic; niche player; overvalued

Abercrombie & Fitch Co

• Rating: Neutral
• Inputs: recent operating metrics have worsened; consumer has shifted to cheaper brands

Gap Inc.

• Rating: Buy
• Inputs: turnaround is happening, albeit slowly

Pacific Sunwear Inc.

• Rating: Buy
• Inputs: obtaining market share through better merchandise; has shed underperforming store concepts

Broadline Retail

WSS Ratings (12-month outlook)

Target Corp.

• Rating: Sell
• Inputs: recent sale of credit receivables encouraging, but the lack of price leadership and evolving business mix should continue to weigh on the stock

Costco Wholesale Inc.

• Rating: Neutral
• Inputs: we recently issued a downgrade after the stock achieved our upside price target owing to valuation and consumer uncertainty

BJ’s Wholesale Inc.

• Rating: Neutral
• Inputs: issued a downgrade after solid March sales data as a result of valuation and margin concerns