Retailers Post Comps for February; Trends Prove Hard to Find

The bulk of large retailers reported February same-store sales this morning, and investors who were hoping to come away from the release with a clearer picture of consumer spending or any broad trends were most likely disappointed. 

The overall tone was weak, let statistically and anecdotally by Wal-Mart’s (WMT) below consensus .9% YoY gain.  Wal-Mart’s performance wasn’t surprising to us or the markets given their numerous operational and PR breakdowns, as we highlighted earlier today , and is counter-balanced well by Target’s 5.7% comps, a moderate beat of 5.1% estimates.  Wal-Mart traded flat on the day, closing at $47.88, while Target was up 1.8% to $61.69.

Valuations between the two big boys is still tight, with WMT shares trading at a forward P/E of 13.4 and TGT shares only a tad higher at 15x.  If results like today’s continue to play out in upcoming months, the spread in the valuations of the two companies is bound to get wider. 

Setting those two aside, we see very scattered “comps” results from the major players:

Federated Department Stores (FD); 1.2% same-store sales growth, versus 2.8% estimate

J.C. Penney (JCP) decrease of .2% vs. estimate of -.5%

Kohl’s (KSS); 4.4% increase vs. 2.9% estimate

Gap (GPS); 4% decrease vs. estimates of -4.8%

American Eagle Outfitters (AEO); 6% increase vs. estimate of 8.8% increase

Nordstrom (JWN); 9% increase vs. estimate of 5.7%

Saks (SKS); on Wednesday reported increase of 24.7% vs. estimate of 6.8%

Scanning down the list we notice a bit of a trend towards the high-end retailers outperforming, and weaker performance at the more discount-oriented stores.

This may be reflective of broader economic trends, and it might not be; so far it just tells us that rich people still have some money to spend.  But considering the strong performance of competitors American Eagle, Nordstrom, and Wet Seal (+ 5% comps), there aren’t many excuses for the poor comps seen at the likes of Abercrombie (ANF), Pacific Sunwear (PSUN), and Urban Outfitters (URBN) that count for much. 

This isn’t about the weather; it’s about some of them being either out of fashion, out of touch, or too bloated.  It’s simply what happens in retail, an industry with a notoriously high attrition rate.  Abercrombie already had a lot of weakness priced into the stock, which held steady today ay $74.77 and trades for less than 13x forward earnings.  Same goes for Pacific Sunwear, which trades for about 17x estimates. 

Urban Outfitters (URBN), on the other hand, still goes for over 26x forward earnings, as we brought up. Tuesday prior to today’s earnings release.  Urban reported net income for their fiscal 4^th (which ended 01/31/07) of $35.7 million, up .4% YoY.  While overall sales were up 13% for the quarter, same-store sales fell 5% and forecasts call for more negative comps in upcoming months.  Urban could still turn things around, but in order for their analyst estimates to remain intact for this year, they’ll have to post some big numbers pretty soon.

It also looks like we could be entering a period where retailers are going to be judged and traded based on their own merits, given the discrepancies seen in today’s data and the overall markets’ shrugging of the shoulders over economic growth. If that’s the case, valuations could be set to shift within the sector.

Ryan Barnes