7 Retail Stocks: Which Stockings Were Filled in December?

NEW YORK ( TheStreet) -- It was a very Merry Christmas for retailers, but with the holiday season behind us, and no imminent catalysts left for shoppers to open their wallets, will they continue to spend in the New Year?

That's the million-dollar question heading into December same-store sales results on Thursday. The biggest focus for investors will be any meaningful upgrades to fourth-quarter earnings guidance.

Overall, analysts are looking for a 3.3% increase in December same-store sales year-over-year, according to Thomson Reuters.

Severe weather across much of the U.S. toward the end of the month spooked investors, but data from the International Council of Shopping Centers and Goldman Sachs released on Tuesday shows chain store sales for the last week of the month ended Jan. 1 still grew 3.6% from 2009.

However, as discounting once again remained the biggest trick up retailers' sleeves this holiday, concerns are looming regarding margin integrity in the fourth quarter and if spending can continue to grow in the New Year.

" We look at 2011 with a jaded eye, as retailers will likely be, especially in the second half, attempting to pass on material pricing increases," Brean Murray analyst Eric Beder, wrote in a note.

Sourcing costs continue to be one of the biggest potential headwinds facing retailers in 2011. Phoenix Equities analyst Robert Samuels expects to see higher prices in the first quarter, with the largest increases arriving in the second half of the year. He also foresees a bigger labor shortage following the Chinese New Year, as migrant workers take better jobs closer to home instead of returning to factories.

"We are hearing about some retailers placing third-quarter orders almost two months earlier to not only lock in cotton prices but also avoid any potential labor disruptions," he wrote in a note.

As a result, December sales results will be critical in deciding which retailers will best be able to handle upticks in cotton, freight and labor costs, and sustain momentum in 2011.

In light of this, we offer a look at how retailers are expected to stack up when they report December sales results on Thursday. Click on for a company-by-company breakdown....

Abercrombie & Fitch

Abercrombie & Fitch ( ANF) is once again expected to be the standout of December, as analysts credit the teen retailer with perfectly playing holiday promotions.

The company's 40% off discount at namesake stores, abercrombie kids, and Hollister, drove traffic and conversions during the holiday. "Consumers responded to the quality of merchandise offering at a promotional price that was far stronger than its peers," Wall Street Strategies analyst Brian Sozzi, wrote in a note.

Abercrombie & Fitch managed to do this even as it materially reduced discounts from last year and chose not to replicate its promotion of handing out $25 gift cards for every $100 spent, like it did in 2009.

"We believe the company will enter fiscal 2012 in a very good inventory position and with the domestic business nearing the stabilization level, allowing for the investor focus to shift even more towards the higher margin, rapidly growing international segment," Beder wrote.

In 2011, Abercrombie & Fitch is expected to shutter underperforming stores domestically, which should allow for even better performance metrics in fiscal 2012.

"At close to $60 a share, Abercrombie & Fitch continues to be well owned as between depressed domestic business and international putting up some of the best top-line results in our group, there could be many ways to win on the stock in 2011," J.P. Morgan analyst Brian Tunick, wrote in a note.

Aeropostale

Aeropostale ( ARO) had much to contend with in December and could post yet another month of a slight sales decline.

The teen retailer entered the month after an overall lackluster Black Friday weekend. The biggest assault on Aeropostale has been the deep use of promotions at Abercrombie's Hollister chain.

Traditionally known as the low-price leader, Aeropostale was forced to resort to drastic markdowns in order to remain competitive, which comes at an expense to margins.

"That said, we believe Aeropostale has the ability to bounce back in terms of margins when pricing and inventory stability return," Beder wrote. "While it is becoming evident that inventory stability in the teen segment is materially improving, it remains unclear about overall pricing stability."

This makes the first quarter of 2011 especially important as a gauge for where Aeropostale will fit in the teen space going forward.

The recent departure of Co-CEO Mindy Meads is also something that deserves a closer look. "Tom Johnson is not a merchant, he is an operations guy," Samuels wrote. "That leaves us wondering, who is going to be in charge of placing the critical holiday 2011 orders?"

Aeropostale has also been the subject of takeover chatter in recent months. "While the market waits on pins and needles for a potential takeover of Aeropostale in light of recent management shuffling, we think attention to the fundamental story near-term is more of a pressing issue that could knock added wind from the share price," Sozzi wrote.

Limited Brands

Limited Brands ( LTD)was one of the best performing retail stocks of 2010.

Much of this success can be credited to its Victoria's Secret chain, which continues to defy expectations by posting substantial same-store sales increases while being less promotional than last year. The division has seen strength with its Pink brand and the recent NFL launch.

Following November sales results, Limited lifted its same-store sales estimates. "Given the momentum of the business in the past few months (they've beaten their comparable sales guidance by more than 500 basis points each of the past five months) expectations are they will beat their guidance handily," Tunick wrote in a note.

But sentiment on the stock continues to be high, and if you believe some reports of lackluster mall traffic in December, deflating expectations could be in the cards for Limited Brands. "Any slowdown in the business at current levels likely would bring bears out of hibernation -- especially now that the special $3 dividend has been paid out," Tunick wrote.

Target

Expectations are high for Target ( TGT) in December, but the discounter is poised to live up to expectations.

Target was aggressive way ahead of Black Friday and kept up this momentum throughout December, making it poised to be the biggest holiday winner amid the discounters.

December marked the second full month of the RedCard 5% Rewards program, which has been credited for the significant acceleration in comparable sales from October to November. It is also seeing strength in its apparel, food and consumer electronics categories.

Following better-than-expected sales in November, the company expanded its guidance range to low-to-mid single digits from the low-single digit outlook it held for much of the second half of the year.

Target is also benefiting from the mistakes of rival Wal-Mart ( WMT), who removed thousands of items from its shelves earlier in the year that it deemed unprofitable, losing shoppers in the process.

While the retail giant is currently in the process of restocking some of this merchandise, Sozzi says it is doing a poor job of informing customers of its progress.

But Wal-Mart's blunder has most likely resulted in market share gains for Target.

Gap

Gap ( GPS) is on track to report its second consecutive same-store sales increase in December following seven straight months of traffic declines.

"We think holiday 2010 will have been kind to Gap on the profit line, perhaps more so than consensus has modeled," Sozzi wrote. "We point to generally consistent promotions at namesake stores and Banana Republic through November and December, with no large raises in the days leading up to the Christmas holiday. In the weeks preceding Christmas and thus far after the holiday, we noticed out of stock items across the board at Gap and in men's and women's tops at Banana Republic."

As a result, Sozzi predicts that Gap could raise its guidance following its same-store sales report.

Of course, the past two months of sales gains will likely come at the expense of margins. But this shouldn't come as a surprise to investors.

"The more interesting story lies on the expense lines, as lower fixed costs combined with top-line increases, should lead to some meaningful bottom-line growth in the fourth quarter.," Tunick wrote.

American Eagle Outfitters

American Eagle Outfitters ( AEO) has been one of the worst performing stocks in the specialty retail space, as investors question the company's inconsistent recovery.

While the teen retailer planned inventory conservatively in the fourth quarter, American Eagle ended December with deeper promotions than last year.

"We are concerned that American Eagle's tight inventory, and now increasing need to be promotional, may cap any potential gross margin upside we thought may exist," Janney Capital Markets analyst Adrienne Tennant, wrote in a note. "At this point, we believe there is little potential for EPS upside to the company's 43 cent to 46 cent range."

The increasingly lower price points at Abercrombie's Hollister chain has put pressure on American Eagle, forcing it to become even more aggressive on its own discounting. But even American Eagle's buy on get one 50% off promotion wasn't enticing enough to drive traffic and sales.

Beder also believes there's a chance American Eagle may lower its fourth-quarter guidance following its same-store sales results. "We believe American Eagle remains a business model that is not designed to produce material year-over-year returns in maturity," he wrote. "We are seeing this thesis play out in vivid colors in 2010."

Costco

Costco Wholesale ( COST) has been on a tear, with shares running up about 25% since the fall.

Investors have become increasingly bullish on the stock due to the potential of a membership fee increase over the next 12 months and an acceleration in new unit growth. But as the stock nears $75 a share, Sozzi downgraded the stock to hold from buy, saying it is at appropriate levels.

In December, comparable sales may see the continuation of November's momentum in food and consumables, jewelry, small appliances and apparel. But the wildcard is how the industry-wide softness in television sales during the holiday will impact Costco.

Analysts believe Costco is losing market share in this category due to the appearance of being less promotional than its peers.

Another unknown is the effect of Costco's decision to discontinue selling Apple ( AAPL) merchandise, says UBS analyst Roxanne Meyer.

--Written by Jeanine Poggi in New York.

>To contact the writer of this article, click here: Jeanine Poggi.

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