Be Selective With The Retail Group

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This morning February retail sales came in much better than expected, diverging from what individual retailers reported last Thursday. The U.S. Bureau of the Census, said sales increased 1.1% versus the Bloomberg consensus estimate of 0.5%. That result compares to a upwardly revised 0.2% increase in January. Strength this month was seen in building materials & garden equipment, food & beverage stores, clothing & apparel, and general merchandise stores.

Last Thursday, a handful of retailers, including specialty retailers, warehouse clubs and teen retailers, released their sales results for the month of February. While the results came in better than expected, they showed a deceleration from January, opposite of what the broader report today showed. There were plenty of excuses for the slowdown by individual retailers - cold weather, payroll taxes, delayed tax returns, and higher gasoline prices. Those seemed to be ignored by today's report.

Retail stocks have typically reacted to the retail sales data, despite the fact that the individual retailers reported results the Thursday before. Today the retail sales data is giving the SPDR Retail Index ( XRT) a boost, indicating the data now plays a more significant role in the trading of retail stocks. That isn't surprising, because over the last few years the number of retailers releasing monthly sales results has decreased significantly, with the decline continuing into the start of fiscal 2013 (begins in February for most retailers). Case in point, in January there were 18 retailers reporting same store sales tracked by Thomson Reuters, but in February (when fiscal 2013 began) only 11 retailers reported monthly sales.

The largest change came from the department stores - 5 reported monthly sales in January, but none reported sales in February. That group could see a more dramatic move in the stocks today. MasterCard Advisors previously said that the department store group had mixed results in February, with the luxury department stores faring worse than the moderate stores. Today's report showed that the department store sales declined 1% from January on an adjusted basis. The department store sector isn't broken out by luxury or moderate groups. Clothing stores sales, however, increased 0.2% on an adjusted basis in February. That likely includes smaller boutique shops, and its likely those types of stores are taking share from the department stores as customers look for a more intimate experience.

In the luxury department store space, Saks ( SKS) has put near-term pressure on sales for the group because of the impact Hurricane Sandy had on their east coast presence. The company posted a 0.7% same store sale increase in the fourth quarter of 2012, slightly better than the flat guidance, but below the 6.3% same store sales increase Nordstrom ( JWN) reported and the 5.3% increase at Neiman Marcus.

Based on the commentary from MasterCard Advisors, it's possible that the impact of winter storm Nemo, which dumped large amounts of snow in New England (a big market for Saks), could have impacted sales at Saks in February, dragging down sales for the luxury department store group.

Management has been cautious on sales, stating that 2013 will be a volatile year given higher taxes and fiscal uncertainty. Saks is also in the midst of a transition year as they expand IT initiatives and improve the e-commerce business. That will put pressure on margins as well as the stock near-term (it's trading at a premium to the department store group).

Gap ( GPS) and TJX ( TJX) were two retailers that pleasantly surprised investors with their better-than-expected February same store sales last week. Gap's Old Navy division was surprising resilient despite the impact the payroll tax had on lower-end consumers. The company is delivering trend right merchandise and is managing inventories well, and the stock has been on an uptrend since reporting earnings at the end of February.

TJX, the operator of TJMaxx, Marshalls and Home Goods stores, benefitted from the improved weather conditions at the end of the month and exhibited strength in the home business during the month.

It's become a tough environment for retailers to manage their business given not only the payroll and gasoline concerns, but also the political uncertainty surrounding the sequester. Sarah Quinlan, Senior Vice President at MasterCard Advisors, says retailers are "seeing changes in sales day to day, week to week, and month to month. As such they have to manage their business on those time frames."

That being said, today's broad industry report shows that not all retailers are being negatively impacted by the external pressures. Retailers that have the right strategy and the right merchandise are winning in this environment. Not all retailers are created alike.

-- Written by Lindsey Bell in New York.

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