3/4/2010
By Brian Sozzi, Research Analyst

More Articles by Brian Sozzi

The common thread in all the February same-store sales previews was that the pure nastiness of Mother Nature to those living on the East Coast would detract from the generally positive story emanating from the retail sector entering 1Q10.  Even we reasoned that there was downside risk to raised sell-side comp estimates for those companies having outsized exposure to the East Coast; our estimated impact on comps was 2.0% to 5.0%.  Alas, in the numbers received this morning most retailers from different walks of the sector posted above consensus February comps, with underlying demand trends seemingly diminishing the storm impact.  Among those companies in our coverage universe, we estimate that storms negatively impacted February comps by 1.0% to 2.0%; people found their way to the malls and discount centers and once there, bought merchandise.  On the encouraging side, consumers were nibbling at spring season merchandise at full-price, first markdown products on spring product, and leftover wear now (winter) items.  Although our subset of the retail sector refrained from issuing 1Q10 EPS guidance, perhaps trying not to becoming too enamored and cause a case where comp estimates run higher, and fast, the market's reaction to the results suggest 1Q10 is trending well.

Key February Takeaways

* Our specialty apparel coverage universe comped positive for the second consecutive month, with the overall gain accelerating relative to January.
* Sales in hard-hit housing markets (California, Florida, and Arizona) are continuing to come back (see in the results from Costco, Zumiez, Abercrombie & Fitch, and Target).  Housing demand and prices have improved in the state, maybe those bigger houses being traded up to or first timers in love with more space than a rental is leading to this apparel/food buying (more space to put clothes and food).
* Women are shopping once again, interesting as they were a great signal to the fall off (they stopped shopping and allocated those funds saved to children, explaining why sales from those chains held up for longer) in retail demand in mid-2008 and 2009.  In many respects, sales of women's apparel began to soften late in 2007, so after being away from the malls for so long we suppose they can't help but to now reengage.
* Those companies deciding to rebuild inventory drove appropriate business to support that investment.

Final Note

Retailers are now beyond what sure appeared to be the toughest month in 1Q10.  Score one for the sector.  Retailers enter pre-buying ahead of Easter (April 4) with evident momentum and opportunities to drive full-priced sales of initial summer merchandise.  That said, we continue to advocate a careful stock selection approach as it's not the time to make a broad sector call given the jobs situation, wage growth trends, and recently soft economic data.  Our focus is on the retailers that are raising dividends, repurchasing shares, and who have compelling investment theses.

Recent Institutional Client Calls
* Ethan Allen Interiors Inc. (ETH): Issued upgrade on January 28; stock up over 20% yesterday on improved traffic and order trends.
* Abercrombie & Fitch (ANF): Issued upgrade on February 16; stock indicating higher today on another positive monthly comp.
* Urban Outfitters Inc. (URBN): Reiterated Buy rating on March 3; stock indicating higher this morning on a very positive earnings release.
* BJ's Wholesale Club Inc. (BJ): Reiterated Sell rating pre-earnings on March 3; stock declined over 5% on earnings news yesterday.
* Wal-Mart Stores Inc. (WMT): Reiterated Buy rating following 4Q earnings; company out this morning with a sizable dividend increase.

Brian Sozzi
Wall Street Strategies