Wal-Mart, Aeropostale: Retail Winners From a Cheerless Holiday Season

Well, we all knew it would be bad, but perhaps not this bad as it pertains to holiday season sales readings from the nation's retailers. Santa failed to bring good cheer to many leading retailers, including specialty and department stores, as consumers clearly reigned in their purchases of discretionary goods. The comparable store sales (or comps, which are sales from stores opened longer than a year) numbers, at least based on our preliminary analysis, are quite poor, specifically from the specialty apparel sector. Customers withheld their gift purchases extremely close to the Christmas holiday as evidenced by double-digit percentage traffic declines logged at most retailers earlier in December. When they did decide to shop, savvy consumers were promotional focused, causing all retailers to bite the bullet on margins in haste to keep inventory turning. Accordingly, there were material downward earnings revisions across the retail sector for the fourth quarter, with some as big as $0.30 per share versus the consensus estimate.

Consistent with our analysis throughout the holiday season, the two standout winners, and perhaps the only winners for holiday season 2007 were Wal-Mart Stores Inc. (WMT), Aeropostale Inc. (ARO), and Gymboree Inc. (GYMB).

Wal-Mart Stores Inc: Benefited from aggressive pricing on goods ranging from food to general merchandise. Comps at U.S. stores increased a healthy 2.6%, ahead of the year ago gain of 2.3%. The company remains on the comeback trail, and will record a holiday season that far surpasses that of cheap chic rival Target. Wal-Mart outlined a comp increase of 2.0% for January, and maintained its fourth quarter earnings per share guidance.

Aeropostale: The company executed flawlessly on its merchandise initiatives for both men's and women's apparel. Moreover, customers undoubtedly traded down to the brand given their sensitivity to pricing. We are inclined to reiterate our buy rating on the stock as the company's momentum may just translate into a solid spring showing.

Outlook

We plan on making downward earnings adjustments for the fourth quarter of 2007 and first quarter of 2008 for most of the retailers in our coverage universe. At first blush, we are prone to maintaining our underweight ratings on discount retailers, and have become more cautious on select specialty apparel names. Despite trough valuations for a good percentage of our coverage universe, having high exposure to consumer discretionary stocks at this time is unwarranted until the macroeconomic picture begins to stabilize. Key aspects of the economy we are monitoring as signals to become more upbeat in our analysis include consumer confidence, existing home sales prices, retail sales data (which is coming up on January 15), and of course job creation/unemployment.

Disclosure: none