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The trendline for inventory sales over a longer duration is definitely positive for retail in aggregate (see this afternoon’s post). But let’s not forget where we are in the current sales/inventory and margin cycle. 2H08 looks good. Period. We’re seeing sales growth 4-6% in excess of inventory growth (better yet, we’re seeing inventories erode 4-6% less than sales), which is a good margin event. But this spread can’t remain positive forever – in fact it’s never been positive for more than 5 quarters in a row in the history of modern apparel retail. Consensus estimates are calling for a 35bp improvement in ’09 – a year I think we’ll see another 50bp hit to margins.

My point here is that retail is trading at 7.3x EBITDA. Yes, that seems cheap at face value if we look back 5 years. But taking a historical view I can easily argue anything between 4-6x.

This remains a stock-picker’s space. I like RL, FL, LIZ, TBL, KSWS, PSS and ZK. I don’t like GES, WRC, SKX, GIL, DKS, PVH, and VFC.