3/2/2010
By Brian Sozzi, Research Analyst

More Articles by Brian Sozzi

One is very likely to hear that storms negatively impacted February's same-store store sales results and that February is a small month in terms of a retailer's annual sales base.  The end list is probable to have many more tidbits.  On balance, we wouldn't be surprised if the market reacted unfavorably on Thursday when the multitude of same-store sales reports are announced.  Our reasons behind that call include:

Storms could be a major swing point, usually impacting a retailer's comps from 2% to 5% (just think mall parking lots needed to be plowed, stores open late if at all).  Within our equity coverage universe, we reason the following companies had outsized exposure to the inclement weather conditions on the East Coast:

* American Eagle Outfitters (AEO): 31.0% of store base
* Abercrombie & Fitch Co. (ANF): 33.0% of store base
* Aeropostale (ARO): 30.0% of store base
* BJ's Wholesale Club (BJ): 72.0% of store base
* Hot Topic (HOTT): 28.0% of store base
* Pacific Sunwear (PSUN): 25.0% of store base
* Target (TGT): 27.0% of store base
* Urban Outfitters (URBN): 26.0% of store base

Comp estimates from sell-side analysts for the month have been raised from prior estimates.  Of the 17 companies we gathered data from, 29% have had their same-store sales estimates for the month lowered.  The remaining have had upward revisions or were maintained.

The S&P Retail Index advanced in excess of 20 points in February, in spite of the unknown surrounding top line trends.  In our view, this type of buying activity reflects the positive commentary from retail management teams on 4Q09 earnings conference calls, the generally healthy sector balance sheets, and confidence that retailers have cut structural costs enough (lowers risk component) to overcome any top line weakness.  If there are comp misses on the headline and EPS guidance ranges for 1Q (we have largely been kept in the dark on 1Q10 outlooks) are below consensus, it may create a profit-taking environment on the stocks.

Final Note

We disagree with the notion that February is a throw away month for the retailers.  While true that the month is joined with January to clear unsold holiday/early spring merchandise, thus making way for spring merchandise, we believe February 2010 takes on added importance.  Retailers have enjoyed improved comp trends since the summer of 2009, with an acceleration in that trend at least until the end of January.  In our view, the momentum in comps is indicative of the bounce back in economic activity in 3Q09/4Q09.  Now that reads on the state of the consumer have softened, and economic data as a whole has suggested a potential double-dip in economic activity, any detraction from recent positive comp momentum would be viewed in a negative manner by the market.  We wonder if comp trends will soften once again in coming months as the recently reported economic data makes its way into the retail sector numbers.  If this were to happen, 2H10 could be disappointing given tougher comp, gross margin, and operating margin comparisons to 2009, when costs were being pulled from the business at a rapid clip (employee reductions, drill down on working capital).  The first half of 2010, by most accounts, should demonstrate earnings growth for most retailers as a result of the year ago comparisons on comps and margin.

Brian Sozzi
Wall Street Strategies