Retailer Drop Creates Buying Opportunity

Retail stocks are taking a hit along with the rest of the market, presenting a good opportunity to pick up strong players.
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(Retail stocks article updated with closing prices with addition of Urban Outfitters, TJX and Ross Stores stocks.)

NEW YORK (

TheStreet

) -- The massive stock market drop could be a good opportunity to snag some strong retail plays.

The S&P Retail Index saw its biggest decline in over a year during midday trading, before recovering slightly. The index closed down 3.6% to 451.06.

But amid the bloodbath there are some excellent picks, especially after

April same-store sales reports

this morning. Overall, comparable sales for the month increased 0.8%, according to the International Council of Shopping Centers. This is better than its prior forecast of flat to a single-digit decline.

Even before the meltdown, investors were selling off retailers, disappointed with the plethora of companies that missed sales expectations. Of the 26 retailers tracked by TheStreet, 23 fell short of forecasts.

Still, several are worth a second look:

Macy's

(M) - Get Report

, for one, posted a surprise 1.1% uptick for the month, even as analysts forecast a decline of 0.4%. The department store even upped its first-quarter outlook, now expecting to earn between 2 cents and 4 cents, versus its previous break-even guidance.

Nordstrom

(JWN) - Get Report

also was a star of the month, as same-store sales climbed 7.5%, higher than the 6.2% gain Wall Street estimated.

The drugstores

Rite Aid

(RAD) - Get Report

and

Walgreen

(WAG)

also managed to post better-than-expected results, as did discounter

Fred's

.

Urban Outfitters

(URBN) - Get Report

said it saw its same-store sales surge 11% in its first quarter, realizing gains across all of its brands.

Total sales rose 25% to $480 million, higher than the $465.8 million analysts estimated. Direct-to-consumer revenue grew 42% and wholesale revenue inched up 4%.

And don't rule out even those retailers that missed predictions, as April might not be the best gauge. The Easter pushed sales from April into March. For this reason, it is essential to look at the March-April period combined to get a true read on the sector.

Using this metric, names like

Aeropostale

(ARO)

and

Target

(TGT) - Get Report

, are still viable options.

Aeropostale reported a 5% downturn in comparable sales, missing forecasts of a much smaller 0.5% decrease. But for March and April combined, sales climbed 7%.

Even as the Easter shift weighed on results, the teen retailer said merchandise margins for the month increased significantly, and inventory levels remain well-controlled.

As a result, Aeropostale once again upped its first-quarter guidance. It now expects to earn 46 cents a share, from prior guidance of 44 cents. Analysts are calling for a profit of 44 cents.

Similarly, Target posted a 5.9% drop in April same-store sales, significantly lower than the 2.3% decrease analysts predicted. But for the March-April period, Target's sales actually rose a respectable 2.2%.

Despite the steeper decline, the discounter said its saw higher-margin categories performing well. Target saw strength in healthcare, beauty products and clothing sales, but softness in entertainment merchandise like books and movies.

The big-box said it foresees first-quarter earnings that will at least meet Wall Street's outlook of 86 cents a share, if not exceed these expectations. For May, Target expects same-store sales to be up mid-to-high single digits. This suggests that the second quarter has gotten off to a good start, as Wall Street estimates a 4% to 6% increase in second-quarter comparable sales.

Investors should also keep an eye an off-price retailer

TJX

(TJX) - Get Report

, and

Ross Stores

(ROST) - Get Report

. While both slightly missed projections, they were two of the few that saw positive sales and also lifted earnings guidance.

-- Reported by Jeanine Poggi in New York.

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