3/27/2008

Friendly Easter Bunny or Scary Easter Bunny: March Retail Sales Preview
By Brian Sozzi

On April 10, the market receives crucial insight into the spending habits of consumers by way of monthly sales reports from the nation’s retailers.  To be sure, this year’s March data takes on added significance as it will serve to measure interest in early spring merchandise and gift giving demand for Easter at a time of waning consumer confidence.  We currently anticipate mixed to slightly unfavorable comparable store sales (comp) results and 1Q`08 guidance (despite the Easter calendar shift which should positively impact comps in week three of the month) from the specialty apparel sector due to the discretionary nature of the purchase and cold weather constraining demand for spring fashions.  Moreover, late 4Q`07 earnings results from the likes of mall-based apparel chains Charlotte Russe Inc. (ticker: CHIC) and Zumiez Inc. (ticker ZUMZ) underscore the fact that soft mall traffic and cautious spending has persisted into the first quarter.

Amidst the retail rubble we suspect that Wal-Mart Stores Inc. (ticker: WMT) outperformed in the month of March.  The company had a better than expected February comp increase of 2.6%, supported by strong sales of consumables and basic apparel.  For March, management has guided for a comp increase in the range of 0-2.0%; in our view the actual reading may be above the upper-end of the range owing to the Easter holiday boost and buying patterns of consumers presently.  Management should reaffirm its 1Q`09 earnings per share guidance of $0.70-$0.74, though when all said and done, we would not be surprised if a revision is provided upon a solid April sales report.  Our conviction on this occurring stems from Wal-Mart’s favorable inventory position heading into the quarter serving to limit markdowns and an easy year ago gross margin comparison. 

All told, we continue to recommend the stock as buy based on valuation, industry leadership position, clearer marketing message relative to other big box retailers, and improving fundamentals.  Our six-month price target implies upside of approximately 9.0% from current levels.

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.