FBR Capital Markets said that according to its store checks over the Christmas weekend, promotions at the mall continue to be aggressive.
The brokerage said while traffic levels seemed strong, more than ever consumer shops were on sale, and inventory levels in the channel continue to look elevated.
Despite easier comparisons, we believe December to date has decelerated versus a very strong November for retailers (we believe Black Friday was the peak, and mall traffic levels have been running in the down 1 percent to 3 percent range since then), says Anna Andreeva, an analyst at FBR Capital Markets.
In addition, warm weather across most markets has been a negative for sales of seasonal categories such as outerwear and sweaters, especially in the Northeast although weather finally broke over the weekend with potentially some pent-up demand, says Andreeva.
Andreeva's specialty retail group has performed in line with the market so far this month (up 1 percent) and is trading at 14 times of 2012 EPS estimates, in line with historical averages.
Specialty retail stocks tend to rally in the first quarter (underperform in January and outperform in February and March), and Andreeva believes investors will continue to favor operating margin recovery stories into 2012, Urban Outfitters Inc. (NASDAQ: URBN), Aeropostale Inc. (NYSE: ARO), American Eagle Outfitters (NYSE: AEO), given limited top-line visibility.
Andreeva has said American Eagle ran 40 percent off the entire store from mid-December through the Christmas weekend (same promotion as on Black Friday, which was very successful).
American Eagle's inventory levels have been the highest among its teen competitors this second half of 2011. According to Andreeva's store checks over the weekend, inventories looked the leanest she has seen at this concept in some time, indicating strong sales.
Stores moved to additional 25 percent off purchase on Christmas Day, and Andreeva believes the new spring assortment looks strong. After the American Eagle's comments about very strong Black Friday results, Andreeva believes buy-side expectations are for double-digit comps for the holiday (to be reported on Jan. 5) and a raise to fourth quarter EPS, which she believes is doable.
Andreeva said Abercrombie & Fitch Co. (NYSE: ANF) has been running 40 percent off entire store events since mid December, and stores became more aggressive with 50 percent off over the Christmas weekend.
She believes this was planned (she believes the 50 percent off promo was very successful over Black Friday, hence the company repeated it for Christmas).
Andreeva believes sales are running in line to above the Street thus far in the fourth quarter (consensus is looking for 4.1 percent comps for the fourth quarter of 2011) although there's a concern that gross margins could come in below expectations (the company guided for 360 basis points gross margin deterioration). Her estimate is below consensus for fourth quarter ($1.52 versus the Street at $1.58).
Aeropostale ran a $5 T-shirt riot and $12 hoodies over the Christmas weekend and a 70 percent off sale post-Christmas. Andreeva believes the company continues to donate share in the teen space, with warm weather in the Northeast and the more promotional competitive set pressuring results.
Aeropostale is lapping the easiest operating margin comparisons in Andreeva's group next year (she expects gross margins to be down 1,000 basis points this year), and she believes investors own the stock for the inventory reduction story in 2012.
She believes the first half of 2012 could still be very challenging for teen retailers, with Aeropostale's inventories in the 20s and Abercrombie & Fitch likely still promoting to gain share, thus still eroding Aeropostale's traditional price advantage versus competition.
Andreeva says buy-side expectations may have to be reined in for 2012, and she remains on the sidelines with the stock. She expects to hear from Aeropostale with holiday sales on Jan. 9.
She says Children's Place Retail Stores Inc. (NASDAQ: PLCE) ran up to 50 percent off sale and extra 30 percent off everything the day before Christmas, and moved to a one day only, up to 80 percent off Monster Sale the day after Christmas.
Andreeva says Children's Place has been more promotional versus last year so far this holiday season, with steep discounts on some of the seasonal categories (fleece and outerwear currently promoted at 80 percent off).
Children's Place guided for flat to positive comps for the fourth quarter (the bar is for positive comps, in our view) and gross margins down slightly, and we believe there could be some downside to the Street's gross margin expectations, especially as comparisons are more difficult and sourcing pressure remains an overhang, says Andreeva.