Retail Stocks' Imminent Danger

Judging by the month's same-store sales figures, retailers did very well in March. However, many investors seem eager to paint the entire sector with a broad brush, indiscriminately bidding up many otherwise weak stocks. Right now, that's a dangerous practice.

Overall, March same-store sales surged 9.1%, leaving analysts' expectations for a 6.3% increase in the dust. Still, let's not forget that March included an important retail holiday, Easter, and that last March's misery made year-over-year comparisons unusually easy.

March madness
Here's a quick look at several retailers' performance:

*All data from CAPS and company press releases.

Judge these results with a healthy dose of skepticism. Costco's a favorite of mine, but despite the great-looking comps, its March same-store sales only rose 3% once you strip out gasoline and currency effects. Hot Topic couldn't keep up its year-ago momentum, although the special one-time $1-per-share dividend it just announced might get investors excited.

Abercrombie & Fitch posted increases in its comps and net sales for the month. However, it's currently coasting on several years' worth of easy comparisons, since sales have languished for quite some time. The retailer also missed Wall Street's expectations.

Abercrombie exemplifies a potentially perilous pick in the bubbly retail sector. Its shares have surged 87% in the last year, despite scant signs of any real turnaround. It also trades at 26 times forward earnings, far pricier than many of its rivals.

Meanwhile, Aeropostale continues to deliver impressive comps and sales growth, repeatedly proving itself recession-proof. Yet it's only trading at 11 times forward earnings.

Forget the broad brush -- how's the big picture?
Foolish investors should temper euphoria about March comps, and pare down their retail holdings to only the strongest names. Many retailers acknowledged that April won't be nearly as impressive. Easter came early this year, giving retailers a welcome -- and temporary -- boost.

In addition, unemployment and underemployment remain high, forcing many prospective shoppers to tighten their budgets. Recent data showed that consumers steered clear of their credit cards in February; consumer borrowing decreased at a 5.6% annual rate, while revolving credit, which indicates credit card borrowing, fell at a 13.1% annual rate. That's good for consumers and our overall economic well-being, but dismal for retailers' near-term outlook.

Last but not least, gasoline prices have been steadily climbing. Consumers could pay 20% more for gas this summer than last. That might pinch budgets and siphon off cash from shopping.

I still believe the overall retail rally is too good to be true, and that investors should choose their retail stocks very carefully. Investors should seek companies like Aeropostale, which enjoys both long-term resilience and a relatively cheap multiple, instead of weaker players.

Can retail keep up a heady rebound? Or do easy comparisons and macroeconomic gloom make you uncomfortable? Let us know in the comment boxes below.