Retail's Frosty February

February's retail news may not have been quite as abysmal as many people expected, but it's still obvious that times are tough and consumers are spending cautiously. Investors should plot their courses carefully.

Dawn of the discounter
Wal-Mart's (NYSE: WMT  ) hanging tough, as usual. Its February same-store sales increased 3%, versus a 0.8% increase this time last year. (Gasoline helped "fuel" those comps by 0.4 percentage points.) The discounter also boosted its dividend, undoubtedly cheering up shareholders. Even in this cautious consumer environment, it looks like Wal-Mart's back in its element.

Target's (NYSE: TGT  ) 0.5% comps increase may sound meager, especially compared to the year-ago 5.7% rise, but it actually bested analysts' expectations. I think that quality discount retail stocks like Wal-Mart, Target, and Costco (Nasdaq: COST  ) are logical retail investments in an uncertain economy. Sears Holdings (Nasdaq: SHLD  ) may be the unfortunate exception; I believe that its Sears and Kmart brands have worn out their welcome with too many consumers.

Aeropostale (NYSE: ARO  ) also did admirably well in February; its comps jumped 7%, compared to a 2.3% increase this time last year. Aeropostale caters to young people, who tend to be fairly resilient to macroeconomic trends. But the high-fashion apparel it offers at reasonable prices may also work in its favor.

Don't bank on turnarounds just yet
That said, I'll reiterate that now's probably a bad time to invest in stocks still muddling through lengthy turnarounds, however cheap they might appear. Although troubled Pacific Sunwear (Nasdaq: PSUN  ) had a good February, boosting comps 6% versus a year-ago 5.7% decrease, many other struggling retailers continued their poor showings.

Chico's same-store sales plunged 14.9% in February, compared to a 4.3% decrease in comps this time last year, extending its ugly trends. Gap's recent quarter may have impressed some investors, but its February comps gave little reason for optimism, down 6% compared to a 4% decrease last year. Ann Taylor's (NYSE: ANN  ) February comps dipped 1.7% versus last year's 2.9% decrease.

Look for quality, long-term names
As long-term investors, we shouldn't view one month's worth of comps as an influential measure of whether to buy, sell, or hold a retail stock. However, comps do provide investors another look at how retailers are currently faring, and how their present performance compares to previous periods.

Given retailers' recent tough times, I wonder how many more will jump on a growing, dangerous trend I've noted before: discontinuing all monthly comps reports. Macy's (NYSE: M  ) recently made some waves with its decision to cease comps reporting, and I fear many more retailers may opt for the silent treatment as times get tougher. According to Retail Forward data cited in a Wall Street Journal article yesterday, at least 19 retailers have stopped reporting the metric in the last 18 months

I think clamming up about comps is very shareholder unfriendly, however much that short-term data may spark stock volatility. Less information simply can't be a good thing for patient, reasonable long-term investors.

Today, we've learned that consumer confidence is at its lowest since 2002, employment is looking pretty bleak, and the price of oil is surging, among other ominous signs. In my opinion, we're definitely in a recession, and that won't make life easier for many retailers. However, I believe that long-term investors who focus on good, quality companies -- particularly those not currently struggling through a turnaround -- are the best retail stocks for the current environment.


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