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Retail Stocks Too Good to Be True?

By Alyce Lomax – Updated Apr 6, 2017 at 1:50PM

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Maybe so.

Despite a terrible February in the Northeast, filled with punishing snowstorms, the month's retail comps actually looked pretty good. Then again, appearances can be deceiving.

February same-store sales overall increased 4%, much better than the 2.9% increase analysts had predicted. The gain even exceeded January's surprisingly strong 3.3% showing, which probably got some major help from holiday gift cards.

Of course, it's not hard to top last year's rock-bottom figures. In February 2009, overall retail comps fell a gut-wrenching 4.7%.

Here's how a few well-known retailers stacked up last month:

Company

CAPS Rating (out of 5)

February Comps

February Net Sales

Abercrombie & Fitch (NYSE: ANF)

*

5%

16%

Target (NYSE: TGT)

***

2.4%

6%

Zumiez (Nasdaq: ZUMZ)

***

11.2%

19.6%

Hot Topic (Nasdaq: HOTT)

**

(7%)

(5.3%)

Aeropostale (NYSE: ARO)

***

7%

15%

Nordstrom (NYSE: JWN)

**

10%

14.5%

Costco (Nasdaq: COST)

****

2%

9%

*All data from CAPS and company press releases.

Abercrombie & Fitch reported a pleasant surprise with its same-store sales gain, but let's not forget that numerous quarters of flagging comps have given the company some very, very easy comparisons. Last February, A&F's comps plunged a horrifying 30%. In fact, glancing back through the company's press releases, A&F's February comps haven't risen since way back in 2006.

Similarly, Nordstrom's nice double-digit percentage increases compare well only to last year's economic crisis, which left luxury retail in a freefall. Nordstrom's same-store sales in February 2009 fell 15.4%.

That may be the "investor beware" message in this pack of monthly data. Many retailers are simply up against some extremely easy comparisons after 2009's consumer-spending standstill. Looking at any of these numbers in a vacuum simply isn't helpful, and investors ready to celebrate the apparent growth in comps should temper their enthusiasm.

Look out below!
There are still a heck of a lot of overpriced retail stocks right now. Many investors have been responding too euphorically (and simplistically) to factors like monthly same-store sales data, without considering historical trends to determine whether the performance is really that great.

That said, stocks like Aeropostale look better than ever. The clothier has reported very strong same-store sales throughout this difficult economic period. Aeropostale provides more inexpensive teen apparel than many of its peers, which helped the company perform very well throughout the recession.

Last February, Aeropostale's comps rose 11%, climbing even from its 7% gain in February 2008. Clearly, the company's still firing on all cylinders; given its gloomier history, Abercrombie's increase isn't nearly as impressive.

Investors should be cautious about the retail stocks they choose right now. I'm still a fan of companies with a strong brand, little or no debt, and -- as in Aeropostale's case -- discount allure.

Despite retail's recent rally, times remain tough for consumers, so don't bank on a retail rebound yet. Some of this performance is definitely a step in the right direction, but it may look better than it really is. With some retailers doing better than others, investors should ignore the sector's frothy rally, and carefully select the best and strongest contenders.

Zumiez is a Motley Fool Hidden Gems pick. Costco is a selection of Inside Value and Stock Advisor. The Fool owns shares of Costco. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.

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Stocks Mentioned

Target Corporation Stock Quote
Target Corporation
TGT
$152.61 (-0.23%) $0.35
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$466.40 (-4.26%) $-20.77
Nordstrom, Inc. Stock Quote
Nordstrom, Inc.
JWN
$17.96 (-2.23%) $0.41
Abercrombie & Fitch Co. Stock Quote
Abercrombie & Fitch Co.
ANF
$15.88 (1.73%) $0.27
Aeropostale, Inc. Stock Quote
Aeropostale, Inc.
AROPQ
Zumiez Inc. Stock Quote
Zumiez Inc.
ZUMZ
$21.88 (1.02%) $0.22

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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