3/6/2008

February Chain Store Sales Signal Hope
By Brian Sozzi

One word can be used to summarize the February chain store sales data received this morning, and that is hope.  Following a month in which panic markdowns were taken in order to clear through excess holiday merchandise, February was setting up to be a disappointing month for the nation’s retailers.  Customer traffic to malls has been sluggish for some time amid significant headwinds weighing on the minds of consumers.  Couple this with harsh weather conditions in a few parts of the U.S., and the arrival of full-priced spring clothing, and February sales were expected to be quite dour.  But, when all said and done we believe hope reigned supreme in February.

Many companies reported better than expected comparable store sales (comps) results driven by higher average transaction value.  Customer traffic was again an issue for most retailers, especially specialty apparel.  Consistent with recent months, we noticed a divergence between those retailers delivering the goods the consumer wants and those that are lagging the crowd.  Wal-Mart Stores Inc. (ticker: WMT) had a 2.6% comp increase, fueled by momentum in electronics, consumables, and basic apparel.  Smaller rival Target Corp. (ticker: TGT) continued to struggle as consumers curtail purchases of discretionary items in the home and apparel departments; the company posted a meager 0.5% comp increase.  Department stores had soft sales across the board, notably JC Penney, which only suggested the rollout of its anticipated “American Living” brand went “good.”  High-end department stores also continued to display moderating sales run rates.  Winners from the industry were select teen apparel retailers, such as Pacific Sunwear Inc. (ticker: PSUN) and Aeropostale Inc. (ticker: ARO).  American Eagle Inc. (ticker: AEO) was a disappointment both on the basis of monthly sales and 1Q08 earnings per share guidance.

Extrapolating too many positives from February would be a bit foolish, but at this point any indication of consumer interest in buying merchandise is welcome.  Early spring offerings for a good portion of companies were embraced at higher prices and at least preliminarily, the first hurdle to 1Q08 has been passed reasonably.  Our top picks heading into the back half of the year are detailed below, with all having consistent fundamental themes; strong inventory positioning, brand momentum, effective marketing messages.

• Urban Outfitters Inc.
• Aeropostale Inc.
• Pacific Sunwear Inc.
• Children’s Place Inc.
• Abercrombie & Fitch Co.
• Wal-Mart Stores Inc.

Written by Brian Sozzi, a Research Analyst for Wall Street Strategies (www.wstreet.com) specializing in the apparel/hardline goods sectors of the retail industry.