By Stiletto Stocks

After last week’s discussion of Inditex/Zara, I decided to take it back State-side to discuss one of my favorite retailers, Abercrombie & Fitch (ANF). If you’ve followed Dasan’s work, you have likely read his opinion on ANF before. I wanted to provide a little bit of lookback for you all to understand where the company has been, and where it is heading.

4:18 PM, Nov 5, 2009 --

• NYSE up 119.7 (1.8%) to 6,950.16.
• DJIA up 203 (2.1%) to 10,006.
• S&P 500 up 20 (1.9%) to 1,067.
• Nasdaq up 49.8 (2.4%) to 2,105.

GLOBAL SENTIMENT

In a few weeks everyone on Wall Street will start obsessing over holiday sales. To get ahead of the herd (without being too premature), I reached out to one of the best shoppers in the business: Kristin Bentz “The Talented Blonde”:

Damien Hoffman: Kristin, at what should investors start looking in order to get ahead of the herd on the holiday retail stock picks?

Aeropostale (ARO) is one of the numerous teen clothing retailers you see at pretty much every decent-sized mall in America. As of August, the company operated 888 Aeropostale stores in the U.S., 38 in Canada, and 9 "P.S. from Aeropostale" concept stores in 2 states.

The target demographic is the 14 to 17 year old age group, and the company utilizes its own fashions and designs exclusively. Aeropostale differentiates through targeting lower price points and using more promotional pricing throughout the year than competitors like American Eagle (AEO) or Abercrombie & Fitch (ANF).

Retail stores have been among the hardest hit by the recent global recession, but it appears that finally some relief may be in sight. For the first time in 13 months retail sales rose, finishing up 1.1% in September. More big-ticket sales, a later Labor Day, and poor 2008 September numbers all contributed to the better-than-expected results.

Among the best performers were discounters such as Walgreen’s (WAG), which saw higher non-pharmacy sales, and Family Dollar (FDO), which saw its sales rise more than 5%. BJ’s Wholesale Club (BJ) and Costco (COST) also saw robust sales growth, suggesting that consumers are continuing to look for value. However, many teen and children’s retailers posted significant declines, a troublesome development since September performance usually gets a boost from the back to school rush.

The International Council of Shopping Centers (ICSC) - Goldman Sachs (GS) produced its preliminary report for September's Chain Store Sales on Thursday. According to the ICSC, those sales inched higher by 0.1% in September, offering what its Chief Economist Michael P. Niemera called, "the beginning of recovery."

Retail Chain Store Sales Recovery in Question

Plaid is in vogue this fall season. Military themed wares have also caught on, even showing up to a degree in Banana Republic (go figure!). Although there is a sense of fashion in the malls and in discounters (by extension of course), the September same-store sales results are not displaying an aura of differentiation. Retailers largely surpassed consensus comp estimates, and a select few managed to upwardly revised 3Q EPS guidance. For the likes of Aeropostale (ARO), Gymboree (GYMB), and Target (TGT) the merchandise is striking the proper chord with consumers (right price/must have) and operating expenses have been removed from the operating model.

All told, our retail sector coverage, comprised of specialty and discount, produced a -2.9% average comp for the combined August/September periods, which we feel is a truer indicator given the shift in the retail calendar for Labor Day. The number stacks up against a -0.7% comp in 2008 for the same periods; stripping out Wal-Mart (WMT) from last year as the company no longer repots monthly sales and comps did in fact improve y/y, slightly. Part of the trend reversal could be attributed, in our view, to fewer deep promotions (sales=volume + price; the latter is helping at the moment). Retailers have gotten very creative in their promotions, offering for example buy one get one 50.0% off which brings consumers into the stores while preserving margin dollars.

A trip through the mall tells the story: The recession of the past two years has devastated the retail industry, as overspent consumers have put away their credit cards, started paying off years of debt, and put the kibosh on shopping.

[Slide Show: 10 Retailers Gaining Strength From the Recession.]

4:16 PM, Sep 3, 2009 --

• NYSE up 71.8 (1.1%) to 6,546.60.
• DJIA up 63.9 (0.7%) to 9,345.
• S&P 500 up 8.5 (0.9%) to 1,003.
• Nasdaq up 16.13 (0.8%) to 1,983.

GLOBAL SENTIMENT

Over 30 retailers reported monthly sales results for August over the past two days. While many areas of the economy have been showing relative improvement over the past few months, there have been few bright spots in retail. However, August results provide some hope that things are finally starting to turn around.

Overall sales at the 33 retailers we track decreased 0.4% to $30.054 Billion in August, while same-store sales declined 2.5%. Retailers have now seen same-store sales declines for 12 consecutive months. However, this was the least negative comp sales decline since April.

Portfolio Movers

Lots of companies in my portfolio announced earnings in August. Started off with good results from Gen Growth Prop (GGWPQ.PK) which appreciated nicely this month.

Q2 2009 Earnings Call

August 27, 2009 9:00 am ET

American Eagle Outfitters

Guidance

Analysts are looking for a profit of 14c on revenue of $659.22M. The consensus range is 13c-16c for EPS, and revenue of $646M-$682M, according to First Call. The company recently reported that June and July same-store sales both fell 11%, bigger declines than expected. On August 6, the retailer raised its Q2 EPS view to 16c from 12c-15c. Retail analysts are forecasting the worst performance for stores in over a decade, the New York Times reported on August 17, spurred by fears about the job market and sluggish customer traffic over the last few weeks.

North America retailers have reported a range of results over the past few DESLI U.S. Retailers weeks. The market did not have high expectations, so in many cases the results were not as bad as most investors had feared.

There were some exceptions, with Sears (SHLD) announcing an unexpected loss, due to a pension related write down. Urban Outfitters (URBN), a possible casualty of any CIT (CIT) failure, has seen its short base decline rapidly, almost halving during August. Other large declines in short base are evident in JC Penney (JCP), American Eagle Outfitters (AEO) and Big Lots (BIG). However, the large short bases in Saks (SKS), Buckle (BKE) and Children's Place Retail Stores (PLCE) continue to climb.

As expected, July didn’t provide much of a boost to retailers, as the majority of companies reporting monthly results missed consensus analyst estimates. A combination of unseasonably cool weather, a later Labor Day this year causing tax holidays and promotions to be shifted into August, and consumers continuing to be cautious with their spending resulted in the 11th consecutive month of same-store sales declines.

Overall net sales for July were $27.976 Billion, a 2.7% decline from July 2008. On a comparable same-store basis, sales were down 4.6% from the prior period vs. a gain of 1.7% last July. Retailers continue to be up against tough comparisons from last year when shoppers had stimulus checks to spend. There was decidedly little gains in July from back-to-school spending. Almost every retailer mentioned the effect of Labor day falling a week later than last year – most didn’t start back-to-school promotions until late July or early August, and it seems most consumers are willing to wait for deals to begin the seasonal shopping.

4:18 PM, Aug 6, 2009 --

• NYSE down 40.5 (0.6%) to 6,517.67.
• DJIA down 24.7 (0.3%) to 9,256.
• S&P 500 down 5.6 (0.6%) to 997.08.
• Nasdaq down 19.9 (1%) to 1,973.

GLOBAL SENTIMENT

Abercrombie & Fitch’s (ANF) single year of stupendously positive comps, 2005, is the outlier analysts have never gotten over.

The stock of Abercrombie & Fitch has held a range between $22 and $29 for months, despite a string of some of the worst comparable store sales (comps) ever posted by any apparel retailer—at least any retailer that survived.

Today’s challenging economy and low consumer confidence has led to a 14% decline in fashion spending among US teens and a shift toward value in both fashion and restaurant purchases, according to a survey published this spring by Piper Jaffray.