We are still actively dissecting the June same-store sales data out this morning, but on balance, it appears as if the sector averted the much ballyhooed crash and burn scenario.
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Stimulus checks and favorable weather served as the primary underpinnings to many retailers reporting better than expected comparable store sales (comps). The standout for the month was once again Wal-Mart (WMT), which reported a 5.8% comp increase. Management positioned the company nicely ahead of the economic turbulence now being felt, and as a result is reaping the rewards. The world's largest retailer experienced strength in consumable goods, no big revelation given its price leadership position, while trends in the home and apparel categories continued to strengthen. Second quarter earnings guidance was raised ever so slightly, but in our view investors should anticipate a meaningful beat of the consensus in mid-August given the company's stellar inventory positioning.
Elsewhere, the deep discount retailers, such as Fred's (FRED) and Family Dollar (FDO) had noteworthy sales strength and continued to gain share due to the compelling price points on all goods.
Department stores, in line with our thinking, endured a challenging month as consumers looked to one stop shopping retailers to fill their everyday needs and occasional splurges. We would still avoid the sector, or short it entirely, as it's reasonable to assume that these retail behemoths will report lackluster sales for the back to school and holiday seasons. However, we would begin to pay attention to Kohl's (KSS), which announced a positive June comp amid a clearer marketing campaign and more appropriate merchandise prices. In our opinion, the company has been the best department store in terms of inventory management, and could gain share and surprise on the earnings line for the critical upcoming selling seasons.
Among teen apparel companies, the story was dour as parents simply spent less to outfit their children's wardrobes. Moreover, teenagers have become noticeably more price conscious in recent months, and are seeking lower cost wardrobe alternatives. Aeropostale (ARO) had a stellar month, announcing a 12.0% comp increase and raising second quarter earnings guidance due to healthy merchandise margins. In the space, one stock to watch going forward is Hot Topic (HOTT). The struggling retailer is increasingly reporting better month sales trends and reducing promotional activity in its stores. The company has the easiest comp comparisons amongst its peer base, and if momentum is maintained, financial results in the second half the year could take the market by surprise.
