9/1/2011
By Brian Sozzi, Research Analyst

Yeah, sure, I could have begun by running down the August same-store sales results on this fall-like NYC day, but where is the fun in that?  Instead, the moment has arrived for us to extract clues from the peak in the back to school shopping season and apply them to some form of thoughts on the upcoming holiday period.  After all, Black Friday in October promotions are right around the bend.

The crystal ball has been very fuzzy for us stock handicappers as of late for numerous reasons.  When waving my hand above the retail crystal ball and humming "hmm holiday 2011, hmm holiday 2011" I have been coming up minus a clear picture.  I'd feel greater comfort singing Barry Manilow at karaoke night than warming up to a broad holiday call as the pulse of the consumer is rapid one month and flat-lined the next.  In fact, there are so many mixed signals that it's outright trying to think longer term:

1. Consumer credit up, government retail sales report numbers positive, PCE up, incomes up, savings down.
2. ICSC weekly chain-store data volatile, consumer confidence (Conference Board and Michigan) non-existent, inflation eating up wages and stimulus, job hopping not a characteristic of the new normal, eye-popping results from dollar stores, in excess of 46 million on food stamps.

It looks as if the primary take-away from the back to school season is that by hook or by crook, parents found the spending power to buy inflationary necessities, a splurge, and of course those weekly basics.  As no surprise, good ole mom delivers once again (dear ole mom may be spending less on herself to sustain spending on the household...see the August results from moderate priced apparel chain Cato (CATO) and the sharp shift in sales trends at Ann Taylor (ANN) in 2Q11 compared to 1Q11).  So in spite of how consumers are pouring out their feelings to the good folks at the Conference Board and Michigan, they have managed to grin and bear price increases, which is very important to getting comfortable around placing bets on specific stocks prior to the holidays.

As I wrote a couple of months ago, there could conceivably be an earnings bonanza for holiday 2011 and 1H12 for best in breed retailers due to price increases and receding costs for materials and freight (and if the consumer is spending like this with confidence so weak...).  August is initial confirmation that the consumer's personal balance sheet has the protective coatings to withstand inflationary gale force winds, mostly as savings are tapped into and credit usage is warmed up to.  What ultimately transpired for back to school 2011 mirrors the happenings earlier this year; consumers made some wants and needs happen by driving down their savings.  Only until recently has revolving credit arisen on the scene.

What I Disagree With...

...that there are no must have looks for teens this year.  When I have visited the major teen apparel destinations of Abercrombie & Fitch (ANF), Aeropostale (ARO), American Eagle (AEO), Zumiez (ZUMZ), Pacific Sunwear (PSUN), and Forever 21 this season I have been hit in the face with more vibrant colors, interesting graphics, and slimmer fits than 2010.  Sneakers are a hot commodity, as are accessories, both of which allow the teen to express their individualism.  Layering is still in, and that may be helping the teen retailers (inflationary piece layered on top of inflationary piece).  In fact, I would say the merchandise is so fresh that it's being perceived as a want by the fashion obsessed teen, enough of a want to get mom to dig into the Coach wallet.

* Buckle (BKE) posting strong same-store sales.
* Wet Seal (WTSLA) doing quite well by offering compelling fashion at a strong value.
* Hot Topic (HOTT) putting up flashy sales numbers.
* Zumiez comping nicely on top of year earlier comparisons.
Top picks on this fashion freshness theme continue to be Wet Seal and Hot Topic.  Have warmed up to Nike (NKE) given its global exposure, impending price increases, and how the product is looking. 

August Rundown

As my comments above hinted at, there was no explosion of landmines in the set of August chain-store sales numbers.  There were a few disappointments (Gap, ouch) as I expected, but the winner to loser ratio was better than I thought.  Although consumer confidence weakened markedly in August, the consumer manned up and bought what needed to be bought for back to school...at a quantitative easing influenced higher price than one year ago.  The slight uptick in revolving credit and drawdown in personal savings has to explain why we got the numbers we did this morning from the likes of Limited Brands (LTD), Buckle, Wet Seal, and Pier One Imports (this is interesting as the company set fall, harvest, and Halloween lines in the latter stages of the quarter....so the consumer essentially bought discretionary products to be used at a future date at close to full price). 

Areas of interest:

* Buckle beat big on sales, 8.3% versus 5.2% consensus.  We went long yesterday afternoon, hoping the market responds accordingly today.
* Another solid month from Wet Seal, with merchandise margins up at both divisions.  Fashion at a compelling value continues to work well at Wet Seal division, which is opposite of Aeropostale...basics at a promotional price that get overlooked by fashion hungry teens.
* Hurricane Irene impact ranged from slightly negative to 150 bps negative.  No retailers mentioned it was a benefit, but commonsense tells me that Target (TGT) partook in the panic buying pre-storm (grocery sales up by a mid-teens percentage).
* Macy's (M) began to repurchase its stock at August end.  Company may be planting a stake in the ground, saying the selloff while understandable, is unwarranted.
* Anytime I hear a retailer say "sharper pricing focus" I envision margin pressure.  Kohl's (KSS) entered my thoughts this morning, and the stock is lower as a result of its commentary.
* Department store divergence continues, with Macy's eating the lunch of Kohl's and JC Penney (JCP).
* Gas price drop finally showing up on the doorsteps of dollar stores and discounters, such as regional chain Fred's (FRED).

Brian Sozzi
Wall Street Strategies

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