Demographics Helps Teen Retailers Beat Expectations

U.S. retailers posted their best sales in over a year. Sales at stores open more than a year, a key measure of retailer's health, fell by 2.9 percent, marking a 12th consecutive decline. However, the decline was better than the 3.8 percent drop expected by investment analysts.

It could be argued that the retailers only beat estimates because of the dismal year-over-year comparisons. We would rather leave that debate to more "learned" investors than ourselves. Instead we would like to concentrate on how those retailers beat expectations. How? Pure and simple: demographics!

We highlighted the demographic attraction of teen retailers in our August Age Curve Report, and this segment of the retail trade posted sales much higher than analyst expectations, and we believe will continue to do so thanks to an attractive demographic landscape. Our Generation Y benchmark is Aerospatale (ARO), which had record August results with sales rising 9 percent. The New York-based retailer also boosted its third-quarter earnings forecast by 2 cents, to as much as 80 cents a share. Another bright spot was Gap (GPS), which posted a much smaller than expected 3 percent decline thanks to a 4 percent sales increase at its Old Navy chain.

We are a big supporter of the value retailing sector. Our "Blue Chip" name for this theme is Ross Stores Inc. (ROST). It reported a 6 percent gain, topping analysts' estimates, according to Retail Metrics. The off-price apparel retailers have been posting some of the best results of late and analysts in recent days had raised their forecasts sharply. The demographic driver here is the growing numbers of young school-age children and Ross Stores is well positioned in the fast growing American southeast. The company states:

"We are optimistic about the important back-to-school and holiday periods for a number of reasons. We delivered exceptional sales and earnings growth for the first six months on top of strong results the prior year and are up against much easier comparisons in the second half. More importantly, we are well positioned in the value retailing sector and excited about our merchandise offerings and the availability of great product as we enter the fall season. As a result, we are now forecasting same store sales gains of 5% to 6% for both the third and fourth quarters, up from our previous guidance for a 2 percent to 3 percent increase."

The Reuters/University of Michigan index of U.S. consumer sentiment for August was little changed as reports indicated industries such as housing and manufacturing are stabilizing and the economy is on a path to recovery. The New York-based Conference Board's consumer confidence index rose to 54.1 in August, more than forecast and the first gain in three months.

Yesterday we sold our model Beacon Master Portfolio's holding in Gap Inc ( for a 76 percent profit. The shares over the last five years have struggled to make any further progress between $22 and $25 and we believe it is time at this point of the economic recovery to focus on those companies with a cheaper Price to Sales than Gap (P/S: 1.05).

Therefore, despite our market caution short term, we added a small position in Pacific Sunwear of California (PSUN), Quiksilver (ZQK) and GameStop (GME), and will add to these positions if any market weakness is seen between now and mid November.

Quiksilver yesterday announced disappointing operating results for the third quarter ending July 31, 2009, with net revenues down 11.2 percent, and lowered guidance for the fourth quarter. We believe that with the shares selling on a current P/S ratio of about 0.15, and with favorable demographics, Quiksilver remains a speculative buy on the basis of being able to buy one dollar of the retailer's sales for 15 cents.

Disclosure: No current positions, but PSUN, ZQK and GME featured in our model portfolio.

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[bminfo247:]

Yahoo Finance has some information on clothing stocks that are a favourite amoung the back to school crowd, and details analyst predictions amidst tighter inventory and what should be higher margins:
finance.yahoo.com/news...

Sep 11 10:38 AM