Retail: Still Cautious

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 |  Includes: BONT, FRED, M, WTSL, ZUMZ
by: Wall Street Strategies

By Brian Sozzi

As I have written before, same-store sales release day has lost its luster. There is almost no reason to arrive in the office at 5am to pound out a note on Costco (NASDAQ:COST). Instead, an early morning arrival seems more appropriate if major news from the EU were to hit the wires. So, today, early indications are that September was a boring month by and large for retailers, or was it? Is it the sense of melancholy following the news of Steve Jobs' passing making dissection of obscure retail comments seem unworthy of attention? Not sure to be honest, but I think there are few early clues to decipher:

Average unit retail price increases are saving the day for mall-based retailers; the traffic remains spotty. Here are the examples. Zumiez (NASDAQ:ZUMZ) had another month of strength in its dollars per transaction metric, offset by another monthly decline in units per transaction. Wet Seal (WTSLA) missed its sales plan for the month, but it was able to send a strong signal on margins to the market as a result of higher ticket prices and on trend merchandise that led to full-price sales for peak back to school. The customer is making choices, but importantly is showing for the second straight month that they could handle price increases...they will just buy one or two fewer units.

Key Management Commentary:

Bon-Ton (NASDAQ:BONT)

"We also experienced lower sell-throughs on selected ladies' and men's apparel where cost increases had resulted in higher retail prices." My take: Competing on price at the department store level, in fact any level, on products that the customer does need is a major headwind to margins [Apple (NASDAQ:AAPL) retail stores continue to run positive sales mix, leading to best in breed operating margins north of 25%]. The comment is consistent to what we heard from contacts at Macy's (NYSE:M); challenges in commodity type women's offerings in September, which has middle America budget and job pressure written all over it.

Fred's (NASDAQ:FRED)

"Additionally, the timing of Social Security payments resulted in a sales shift from September to October." My take: I still think Fred's is bouncing back after a challenging summer period for its customer base. To read that seniors are holding off on purchases due to the timing of SS payments is beyond telling on so many economic factors, from healthcare to the divide on Capitol Hill.

Course of Action

I remain cautious on this mini retail rally that began in late August. To become excited, more retailers have to be doing well, and doing well on a more consistent basis month to month. Even with those retailers beating consensus sales and earnings forecasts for 3Q11, customer traffic is spotty and as further ticket prices hit may become spottier, hence elevating the risk to the holiday season. Above all else, retail stocks should have begun to make a stronger advance by now; to me this is the market's way of saying it will be a competitive holiday season where even the perceived sector winners may not win enough to justify underlying analyst assumptions for earnings.