April Sales Review

We're taking a quick look at this month's retail sales winners and losers this morning. In general, April retail sales numbers were healthy, aided by a calendar shift (an extra day in April compared to last year's period), easy comparisons (April weather was damp and cool across much of the country a year ago, keeping consumers out of stores), and anticipation of tax rebate and economic stimulus checks. Teen and children's apparel retailers led the way, mass merchants and non-discretionary retailers were strong, while women's apparel and footwear retailers continued to languish:


  • Teen apparel retailers - Almost universally, teen apparel retailers sales were quite strong in April. Abercrombie & Fitch (NYSE: ANF), Aeropostale (NYSE: ARO), and The Buckle (NYSE: BKE) all reported same-store sales above 20%, and sales at American Eagle Outfitters (NYSE: AEO) were also solidly positive. After a disappointing March, we believe Spring Break and early summer shoppers, coupled with the easy comparisons a year ago, generated the strong April sales results. That said, teens are a extremely fickle group to satisfy - preferences are constantly evolving. Which is the right stock for you out of the aforementioned group? We're partial to The Buckle because it doesn't get the same publicity as others in this space (we've owned it in the past, but don't hold a position now), but each of the companies are well-run companies with relatively strong merchant teams. Our advice: wait for the upcoming 1Q08 earnings announcements (retail expectations are still tepid at best, and a pull-back is possible), then buy the teen retailer that with the best comparable inventory position (i.e, the lowest comparable inventory levels, year-over-year).
  • Children's Place (NASDAQ: PLCE) - Children's Place reported solid sales growth of 24% during April (the four-week period ended May 3), including 15% comps (8% transaction growth, 7% average ticket). This brings total 1Q08 sales growth to 12% and comps of 5%. According to the sales call, outlet locations were a key driver of strength. With last week's divestiture of the Disney Store business, we expect much more stability in future results due to the natural replacement cycles associated with children's apparel. The stock has rebounded nicely from January lows, but we believe there is still room for appreciation. We would accumulate until the mid $30 range.
  • Urban Outfitters (NASDAQ: URBN) - Urban Outfitters continued its strong sales trend, posting 1Q08 sales growth of 25% and comparable-store sales growth of 10% (10% at Urban Outfitters, 10% at Anthropologie, 19% at Free People). Anthropologie remains one of the strongest brands in retail, fueled by an upscale target demographic with a propensity to spend (a slightly younger, more fashion-conscious audience than women's apparel retailers we will discuss in a minute). Urban Outfitters' assortment continues to improve, aided by its "broad and shallow" inventory approach. With the ability to further raise initial mark-up (IMU) through sourcing improvements, increased attention to reducing occupancy expense, and improved point-of-sale (POS) systems and planning/allocation systems, we expect profitability to remain in the mid-to-high teens over the foreseeable future. That said, the stock is already trading at a peak forward earnings multiple (around 30x, using consensus estimates), and the company faces more difficult comparisons than most retailers in the coming periods. We remain upbeat on Urban Outfitters, but would wait for pull-backs to initiate or add to long positions.
  • DSW (NYSE: DSW) - Footwear remains one of the most challenged sectors in retailing, and DSW's 1Q08 sales are further evidence of this trend. The company reported a 3% sales increase in the quarter, with comparable-store sales growth of -5%. Additionally, management revised its full-year guidance downward, saying that it now expects full-year comps in the negative mid-single digits and EPS between $0.75-$0.85 (management had previously provided a 1H08 outlook calling for negative comps and EPS of $0.68). We still find DSW a unique concept among footwear retailers, offering nearly 300 high-end brands at value prices. The "big white box" stores that company has been known for will gradually be replaced by a enticing new format reminiscent of Anthropologie. However, the truth is that it is a difficult time for footwear retailers - 3+ years of strong sales has left the industry with over-supply and insufficient demand, there is a lack of strong footwear fashion trends driving traffic to stores, and increasing production costs in China are pressuring margins. Although the stock is trading at trough multiples, we believe footwear investors must have a long-term horizon until there is better visibility (long positions paired with covered calls may be appropriate, as we do not expect much appreciation in the coming months).
  • Women's apparel retailers - By and large, women's apparel retailers like Limited Brands (NYSE: LTD), Talbots (NYSE: TLB), and Stein Mart (NASDAQ: SMRT) reported disappointing 1Q08 sales results. April was a better month for some, but largely a function of the extra day in the reporting period compared to last year's period. Generally, this group has underperformed since late summer 2007, and we really have seen little evidence (based on store visits, surveys, and conversations with management) to indicate that a turnaround is imminent. If you are a deep value investor looking for a bargain, at least side with the companies in this group that have clean balance sheets (i.e., debt free). Otherwise, we would stay out of these names altogether. Buying opportunities will present themselves, but now is not the time.
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