9 Retail Stocks Fighting the Back-to-School Blues - TheStreet

NEW YORK (

TheStreet

) -- Retailers are flunking at back-to-school.

August, once again, is expected to be a soft month for sales, as warmer weather perpetuated and shoppers are waiting closer to need before opening their wallets. Investors, of course, are crossing their fingers, hoping all of these factors will just push back-to-school sales into September. But it's hard not to think that back-to-school could possibly be turn out to be a dud this year.

It has already been widely broadcast during second-quarter earnings reports that the consumer environment remains choppy and deep discounts will continue to be the theme throughout the fall. As a result, specialty retailers, in particular, will remain out-of-favor in the near-term, said Susquehanna analyst Thomas Filandro.

One of the only potential positives for the month is the addition of new states to the tax-free holiday.

Still, retail stocks may not be poised for that big of a hit come Thursday's reports. "August certainly doesn't sound great, but we're not sure it was any worse than the stocks were already reflecting," J.P. Morgan analyst Brian Tunick wrote in a note.

Overall, the International Council of Shopping Centers is expecting total same-store sales to rise 3% when retailers release results on Thursday.

While the hope is pent up sales are pushed into September, this may not bear fruit. "The crucial five-week September selling period, which will offer the toughest comparisons so far this year, will probably burst he last upside dreams for the remainder of the fiscal year," Brean Murray analyst Eric Beder wrote in a note. "We believe only the low-price leaders and best run companies should be held by long-term investors."

But at least one analyst believes the best of back-to-school has yet to come. "We believe the tell tale sign of how retailers did for back-to-school will be in October as the weather begins to cool down and families get back into the school rhythm," analyst Jennifer Black, of the firm bearing her name, wrote in a note.

Here's a look at which retailers are the better bet ahead of August same-store sales...

American Eagle Outfitters

American Eagle Outfitters'

(AEO) - Get Report

investors should take any positive sales results with a grain of salt. August, by far, has the easiest comparisons for the company in the third quarter.

Given that same-store sales were up about 1% with more than three-fourths of the month completed, it would be almost impossible for the teen retailer to miss its guidance.

But despite more manageable inventory levels, American Eagle still resorted to aggressive discounts, with buy one gets one 50% off on graphic tees and jeans during the month.

American Eagle lowered its third-quarter guidance from already scrawny levels, now forecasting a profit between 23 cents and 26 cents a share. Wall Street is looking for earnings of 27 cents.

"We believe September will see the end of another dream for American Eagle investors," Beder wrote. "We remain downbeat on the company's ability to return to higher margins in the near term and believe, even with the latest round of cost cut, that the company's business model remains in tatters."

Still, there are some underlying positives, including: inventories finally under control, improving trends and potentially trough margins.

American Eagle was also the center of takeover chatter earlier in the month, as reports surfaced that the company is being eyed by private equity. The news drove up the stock.

Investors are also counting on potential management changes to lift share price, Tunick wrote. "We remain underwhelmed with American Eagle's current position in the teen landscape and a low quality second-quarter beat with muted third-quarter guidance is hardly enough to inspire us."

Abercrombie & Fitch

Abercrombie & Fitch

(ANF) - Get Report

is once again poised to report some of the best sales results in the retail space. But the big question is: What happens when the company begins to anniversary price cuts over the next few months?

The teen retailer was one of the last to resort to markdowns amid the recession, only starting to lower average unit retail in the third and fourth quarters of last year.

Abercrombie & Fitch's last two months of sales gains have come at the expense of margins, as it "buys" its sales with deep discounts, Beder wrote. The company offered 40% off denim at namesake stores during the month and 30% off clearance merchandise at all of its divisions.

The company also upped its inventory levels by more than 45% in its second quarter, compared with low single-digit increases by competitors. "Even with the deep cuts last year,

this makes little sense and speaks to a lack of controls at Abercrombie & Fitch," Beder wrote.

Abercrombie & Fitch still has some internal issues, as its domestic business remains confusing and its current level of pricing is unsustainable in the long term, Beder wrote.

But there will be a time to become more aggressive in Abercrombie & Fitch's stock. "We still believe Abercrombie & Fitch's margin recovery story is one of the most compelling in our group, with domestic margins in the 4% to 5% range right now," Tunick wrote. "Domestic sales productivity is still 30% below peak levels, and closing underperforming stores, better fashion and high volume tourist stores should be productivity/expense leverage drivers, which is the biggest key to drive Abercrombie & Fitch's share price higher."

That time just isn't now.

Aeropostale

Aeropostale

(ARO)

, at least in the near-term, may struggle as it faces pressure from pricing wars within the teen space.

As a result, the company has been forced to slightly increase its promotional levels from last year to compete against American Eagle and Abercrombie & Fitch, which are moving closer to its price sweet spot, UBS analyst Roxanne Meyer wrote in a note.

Investors aren't expecting much out of Aeropostale, after a disappointing second-quarter earnings report in which the company issued lackluster third-quarter guidance.

Nonetheless, Aeropostale remains the long-term winner among teen retailers. The promotional levels of its competitors are unsustainable, Beder said. "We believe when pricing reaches some level of normalcy, that Aeropostale will once again begin to register material top and bottom line upside returns. Further, if prices start to increase, which we believe is inevitable in fiscal 2012, that Aeropostale, with probably the best sourcing network in the teen space, will once again register material margin improvements."

Buckle

Buckle

(BKE) - Get Report

seems to be buckling under the pressure.

The premium denim retailer has, for the most part, refrained from promotional activity during the back-to-school selling season, which has no doubt resulted in a decline in customer transactions.

The few promotions it did have, like $99 on select denim styles, which is a $10 to $15 cut on the original ticket price, failed to entice shoppers.

Buckle's women's division, in particular has struggled, and analysts are not anticipating any meaningful changes in the near-terms.

Its price on denim, which has been a part of Buckle's outperformance over the past several years, also appears to be contracting, Tunick noted.

Limited Brands

Limited Brands

(LTD)

is one of the few retailers actually upping its outlook for the second-half of the year.

After Limited Brands reported better-than-expected second-quarter earnings, the owner of Victoria's Secret and Bath & Body Works raised its August same-store sales outlook to a mid to high single-digit range. It previously predicted an uptick between 1% and 3%.

During the month, Victoria's Secret's launch of its Incredible bra and Pink's NFL co-branded merchandise, drove sales. "Victoria's Secret continues to defy expectations, posting material sales increases while being less promotional then last year," Tunick wrote.

"Given the continued strength in the business, sentiment on the stock continues to be high, yet shares have been moving down with the group over the past few weeks," he continued. "As long as both businesses continue to post solid comps on down inventory, with visible margin drivers in place, there isn't much of a bear case that we can make right now."

BJ's Wholesale

BJ's Wholesale

(BJ) - Get Report

could see its same-store sales come in at the low-end of its guidance due to increasing competition and tougher comparisons.

The wholesaler has missed the low-end of its sales guidance for the last three quarters due to intense competition from

Wal-Mart

(WMT) - Get Report

and discounting at traditional supermarkets, Meyer wrote in a note.

Target's

(TGT) - Get Report

expansion of its P-Fresh grocery segment has also intensified competition within the sector.

Wal-Mart's price rollbacks in its grocery segment have been a thorn in BJ's side. But as the discount giant terminates these aggressive promotions, BJ's has noted that there has been some easing of competition. Still, Meyer said she expects BJ's remained aggressive with price investments in August.

BJ's forecasts continued negative same-store sales on TV's compared with last year's boost due to the conversion to digital.

While back-to-school isn't a major driver of sales at the chain, BJ's said its back-to-school merchandise is doing well, Meyer noted.

Target

Target's

(TGT) - Get Report

August sales should come in at or near consensus of low-single digit growth, as it faces tough comparisons for the month.

While the discounter has said its back-to-school trends are encouraging and so far on par with plans, the late start to the season has surely delayed purchases.

"September may see some of the spillover in back-to-school traffic, and the hot weather in August could lead to reduced sales of seasonal fall apparel," Meyer wrote.

Target's food sales should continue to drive growth and traffic should remain positive in August. Still, average ticket prices remain negative, as the company took a cautious tone on the economic recovery in its second-quarter conference call, Meyer wrote.

Gap

Gap

(GPS) - Get Report

remains one of the most hated stocks in the specialty retail sector. While the company is calling for same-store sales to be about flat, investors are anticipating negative results following missed plans in May and June.

The company is banking on its black pants to drive sales throughout the fall, but the launch of the pant didn't live up to the same hype as its 1969 jeans did last year.

Traffic trends are still expected to remain weak at Gap, which will leave Old Navy to drive sales. The retailer has beefed up its promotional offerings recently in order to retain its value image as most mall retailers increase discounting.

July sales grew just 1%, driven by higher clearance inventories and markdown selling.

"We are concerned that Gap's traffic relative to mall traffic is at a delta that is similar to early 2009, which is troubling to say the least," Tunick wrote. "Given sales slowdown, inventory build, peak margins and product cost inflation issues that are all weighing on shares, Gap may be the most hated name in our group right now."

TJX

Sentiment on

TJX

(TJX) - Get Report

has soured, as same-store sales slow, margin guidance is disappointing and earnings revisions have turned negative.

Both TJX and rival

Ross Stores

(ROST) - Get Report

, where were the darlings of the recession, issued their first downward earnings revision in over a year following second-quarter results.

Analysts are calling for a 2.1% rise in August same-store sales.

"While inventory cancellations are a long-term positive, the highly promotional on-mall atmosphere seems to be a near-term headwind," Tunick wrote.

--Written by Jeanine Poggi in New York.

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