9 Retail Stocks: Will October Sales Trick or Treat?
NEW YORK (
) -- Just how scary was October?
With no major event to lure, October retail sales will be a product of weather, inventories and overall traffic. Unfortunately, on almost all levels, the month was a disappointment, according to analysts.
The International Council of Shopping Centers is forecasting sales for the month to increase between 2% and 2.5%.
Weather was warmer than normal, hampering sales of fall merchandise like sweaters. Many retailers also overbought earlier in the year when it appeared consumer spending was in the midst of a full recovery. When fears were reignited and consumers pulled back, retailers were forced to increase promotional levels.
Still, investors have gotten less underweight in the sector since September's better-than-expected comparable sales, and the hope is that October will continue to receive a backlog of back-to-school spending, J.P. Morgan analyst, Brian Tunick, wrote in a note.
And despite a 75% surge in cotton prices over the past year, stocks in the space have outpaced overall indexes in the past few weeks, on leverage buyout hopes post-Gymboree deal. "We think it will be interesting to hear how companies are thinking about 2011 gross margins now," Tunick continued.
Regardless, any crack in October results shouldn't color investors' outlooks for the holiday season, as the expectation is that shoppers are holding off on major purchases until the Black Friday kick-off.
"Consumers are increasingly buying closer to need, which does not bode well for October given that it was unseasonably warm and is a clearance-driven month," UBS analyst Roxanne Meyer, wrote in a note. "However, already low Street expectations, coupled with significantly easier comparisons for some in the specialty space, could provide some cushion for upside."
In light of all this, here's a look at which retailers are poised to provide a sweet treat and which will trick investors.
Abercrombie & Fitch
Abercrombie & Fitch's
(ANF) - Get Report
monster sales numbers over the past several months could be enough to distract investors from gross margin worries.
The teen retailer's margin recovery story is also one of the most compelling in the group, Tunick, wrote in a note. Domestic margins are in the 4% to 5% range right now, while domestic sales productivity is still 30% below peak levels. The closing of underperforming stores, improvement in fashion and high-volume tourist stores should all combine to drive productivity and expense leverage -- and, in turn, drive Abercrombie's share price higher.
Still, these double-digit same-store sales increases are predominantly driven by easy comparisons, not fashion excitement, says Brean Murray analyst Eric Beder.
There is also a growing concern that the teen retailer is aggressively expanding internationally, just as the macro backdrop gets tougher.
"While we continue to view the longer-term potentially exciting for Abercrombie, we believe the Street expectations after the 13% surge in September
to be materially overblown in terms of both the top and bottom line," Beder wrote in a note. "October should inject some reality into the investment equation."
Abercrombie has not provided third-quarter earnings guidance, and analysts aren't expecting much color about the quarter during its October sales call.
American Eagle Outfitters
It looks like
American Eagle Outfitters
(AEO) - Get Report
may have finally turned the corner. Nonetheless, analysts remain bearish on the company's current position in the teen space.
"While bulls will point to the underlying positives, which include inventories being well controlled, improving sales trends and potentially troughing margins, we are not sure how the combination of higher sourcing costs and the ongoing deflation in average unit retail in the teen space will lead to a significant gross margin recovery," Tunick wrote.
American Eagle upped its third-quarter guidance following better-than-expected September sales. The company now expects earnings in the range of 27 cents to 28 cents a share, from prior forecast of 23 cents to 26 cents.
Wall Street is forecasting a 1.5% uptick in October comparable sales.
"Unfortunately,
American Eagle has done little to drive the top line in a period of material price cuts by their competition, and surprisingly, has not led to year-to-year bottom line upside, as we believe the company has begun to feel the effects of higher costs, and that, for all the talk of fashion excitement, their assortment remains flat and unexciting," Beder wrote. "Our issue with American Eagle remains weak returns and a valuation that seems to assume the company will find some magic elixir to drive solid and consistent upside of tough competition. We do not see the reason for upside optimism."
Aeropostale
On the heels of September's better-than-expected same-store sales, the sentiment for
Aeropostale
(ARO)
has improved.
The company is forecasting third-quarter earnings between 61 cents and 63 cents a share, which includes a 4-cent charge related to the retirement plan of chairman and former CEO Julian Geiger.
For October, analysts are predicting a 3.3% rise in same-store sales, which should be easy to reach given that Aeropostale is up against some of the easiest comparisons in the space.
Nonetheless, investors are worried about the value-priced retailer as Abercrombie & Fitch and American Eagle lower prices closer to Aeropostale's sweet spot.
"Aeropostale shares are the cheapest in all of soft-line retail and are likely to remain in the penalty box as investors wait and see how Abercrombie & Fitch's pricing strategy and American Eagle Outfitters inconsistency plays out on Aeropostale's top and bottom line in the second half of 2010," Tunick wrote. "While it is unclear how long others can continue that strategy for their brands, in the short term that likely takes Aeropostale out of its comfort zone and its EBIT margins over 17% appear vulnerable."
Although this may be a problem in the near-term for Aeropostale, it still has one of the best business models, according to analysts.
"We believe within the teen space, Aeropostale has the best promotional strategy, possibly limiting the pressure on third-quarter gross margin," Stifel Nicolaus analyst, Richard Jaffe, wrote in a note. "Given that value has always been at the core of Aeropostale's operating strategy, management has built a flexible and responsive business model that enables them to measure the elasticity of demand and to react quickly to change. This ability to read and react to customers' desires allows Aeropostale to maximize selling prices and minimize markdowns."
Gap
Gap
(GPS) - Get Report
is being weighed down by Old Navy.
Old Navy has been a challenge for the company, as competition in pricing remains fierce, with competitors offering more compelling merchandise at similar price points. "The Old Navy customer seems to be under more pressure, and we expect average unit retail to be under considerable pressure given both planned promos and clearance," Tunick wrote. "We note that they held their fleece event last weekend, but unseasonably warm weather may have put a damper on that."
Gap management noted that October performance was expected to be more challenging, as its brands move to aggressively clear inventory ahead of the holiday season. September sales came in weaker-than-expected, hampered by declines in traffic.
Analysts are forecasting a 2.2% decline in Gap's same-store sales.
The company has not provided third-quarter guidance, and analysts do not expect management to provide a forecast on its sales call. "Our checks over the month at Gap brand continue to raise some concerns over the lack of color, and we continue to caution that without a sense of newness, shoppers may think twice about opening their wallets," Tennant wrote.
Limited Brands
Limited Brands
(LTD)
is expected to once again be the winner in the retail space.
The company guided October same-store sales up mid single-digits following its September sales report. But buy-side expectations are believed to be closer to a 6% to 8% range.
"Limited continues to execute the business well, benefiting from appropriately managed inventories and delivering heightened product newness," Filandro wrote.
Victoria's Secret is the company's bread-and-butter, managing to post material sales increases all while being less promotional year-over-year. Its Pink brands is helping to boost results, as well as the recent launch of its NFL-branded merchandise.
"Given the continued strength in the business, sentiment on the stock continues to be high," Tunick wrote. "While some may view the lack of guidance raise at the analyst day last week as a negative, we still believe there is upside to Street expectations."
Last week Limited discussed that a special dividend is likely before the end of the year. Investors are also looking for a $500 million buyback program to be announced early next year.
Target
The big variable for
Target
(TGT) - Get Report
in October is its mid-month launch of its 5% rewards program for card holders.
"Our channel checks have revealed it did very well in initial days, which is as expected, particularly with Target loyalists," UBS analyst Roxanne Meyer, wrote in a note.
So far this quarter, Target's same-store sales have trended toward the low end of its low single-digit range.
"We continue to believe that seasonal and consumables will be strong contributors to October, but unseasonal weather may pressure fall apparel," Meyer wrote.
The discounter should benefit from the continued expansion of its P-Fresh grocery segment, as well as the roll out of the
Apple
(AAPL) - Get Report
iPad and
Amazon's
(AMZN) - Get Report
Kindle.
Target has also remodeled its wireless department, making a push for a bigger slice of the smartphone business.
Zumiez
Zumiez
(ZUMZ) - Get Report
remains a standout in the teen sector.
"Performance continues to be driven by strong product acceptance and well-received bundle deals allowing Zumiez to deliver improved product margins," Susquehanna Financial analyst Thomas Filandro, wrote in a note.
The company upped its third-quarter outlook following a blow-out September, calling for earnings between 28 cents to 30 cents a share, from prior guidance of 25 cents to 27 cents.
This guidance assumes October sales in the mid single-digit range. Analysts are predicting same-store sales gain of 7.8%.
"The momentum at Zumiez does not appear to have subsided," Tennant wrote. "We continue to believe that a heavier weighting towards the guy shopper, as well as the resurgence of the surf/active/boardsport lifestyle and brands, bodes well for continued strength at Zumiez. Despite relatively expensive valuation, we believe Zumiez will continue to be a 'beat-and-raise' earnings story into holiday."
Kohl's
Kohl's
(KSS) - Get Report
faces some of the easiest comparisons of the quarter. An increase in advertising spending should also help fuel positive same-store sales.
"We continue to believe that the exclusive brands
such as Vera Wang, Elle, Fila Sport and Food Network offered by Kohl's gives them a competitive advantage, greater appeal to the consumer, and insulation from competitive pricing," Jaffe wrote in a note.
Kohl's is also successfully attracting new customers and gaining market share in the department store space.
Direct sales, which are included in Kohl's monthly sales figures, are also buoying results, as management increased its investment in the business.
Analysts are forecasting a 2.6% increase in October sales.
TJX
The off-price retailers are returning to favor. Following a fear of slowing sales and disappointing guidance, sentiment for
TJX
(TJX) - Get Report
and
Ross Stores
(ROST) - Get Report
is improving.
"Given our belief that there has been a fundamental paradigm shift among customers to value-priced merchandise, we believe TJX, with its value proposition of offering the right brands at great values, is well positioned to retain these customers as the economy improves," Jaffe wrote.
TJX increased its marketing during the second-half of the year, which is expected to drive traffic and sales.
But Tunick still thinks October same-store sales could fall short for TJX, as his store checks indicate the potential for a slightly negative result for the month.
Wall Street is forecasting a 0.9% decline in sale for TJX.
--Written by Jeanine Poggi in New York.
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