5/9/2008
By Brian Sozzi, Research Analyst

Slowing discretionary consumption, tied of course to an array of macroeconomic related factors, has caused rather dour comparable store sales (comps) results year to date.  Those retailers who failed to properly forecast demand and align inventory accordingly in 2H07 are paying for the lack execution in the form of profit eroding markdowns.  April industry comps were surely encouraging, especially from specialty apparel retailers, as a hitch in the calendar (shift of Easter holiday) and favorable weather led to upside versus consensus readings.  Many retailers in our coverage universe upwardly revised their 1Q08 earnings per share guidance, owing to stronger merchandise margins, though a few firms expressed caution.

WSS Coverage Universe Overview: April 2008

• 18 of 31 companies recorded upside versus consensus comps
• 11 of 31 companies either raised 1Q`08 net sales/earnings guidance or implied solid merchandise margins
• Greater than 50.0% of coverage universe implied a favorable response to mid-month arrival of summer merchandise (at full price)
• Wal-Mart Stores Inc. (ticker: WMT) was the lone retailer to hint that early economic stimulus checks may be positively impacting sales
• We have issued downgrades of retail wholesalers BJ's Wholesale Club (ticker: BJ) and Costco Wholesale Corp. (ticker: COST) citing unfavorable business mix and excessive valuation
• We have issued a downgrade of teen apparel retailer Abercrombie & Fitch Co. (ticker: ANF) citing lack of business traction and a high probability for an earnings warning
• Other observations:  investors should underweight the broader department store sector, save for perhaps Kohl's Corp. (ticker: KSS); investors should stick with proven winners from the specialty apparel arena, such as Aeropostale Inc. (ticker: ARO), Gymboree Corp. (ticker: GYMB), and Urban Outfitters Inc. (ticker: URBN)

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