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March sales were good, but not good enough. The beat-to-miss ratio was 12 companies coming in ahead of expectations and 7 misses. Given the Easter shift and the best March weather on record, we were expecting better on the event – so too was the market based on how these names are trading. The bigger callout of the day are the revisions. With 4 upward revisions compared to zero negative adjustments, April sales day is setting up for some surprises. Companies will be reporting the final month of the quarter in what will be a zero gravity environment at best against 2011 Easter compares.

Here are some additional callouts on this morning’s event:

  • High Low End Bifurcation Remains Intact: Though the spread between the high and low end department stores compressed slightly in March, it remains ~5pts wide. JWN (+8.6% vs +5.7E) & M (+7.3% vs +4.7E) posted strong beats with SKS (+6.3% vs. +6.4E) coming in-line to slightly below consensus. On the low end, BONT (-0.1% vs. +1.7%) missed while KSS (+3.6% vs. +2.4E) and SSI (+4.7% vs. +3.3E) beat estimates for the month. 
  • KSS: After coming in light in February (-0.8% vs. -0.1E), KSS  beat expectations this morning driven primarily by kids (13% of sales) which came in +mid teens and accounted for 2pts of the 3.6% comp. While March sales came in better, the shortfall in February requires April comps to be +0.8% or greater in order to meet guidance of +1% for 1Q12 vs. +0.7E suggesting a +7.6pt sequential acceleration in the underlying 2yr trend. With the Easter shift now a stiff headwind, we see continued risk in Q1 EPS.
  • Off-Price Remains Robust: TJX and ROST both reported March comps +10% beating expectations by 5.1 and 5.4pts respectively, increasing the spread between the off-price space and the rest of retail to 4.6 pts, up 50bps sequentially (see chart below). ROST inventories were down -4% on +15% sales growth droving the sales/inv. spread up +6pts sequentially to +19%. Based on our industry SIGMA analysis (see below), while the sales to inventory spread improved on the margin in 4Q11 at the expense of additional EBIT margin, the spread remains down -7% on +16% inventory growth. As inventories build throughout the industry, we think TJX and ROST will continue to be positioned for more favorable buy-ins over the intermediate term TREND.
  • Earnings Updates: For much of retail, March marked the second month of 1Q12 with April accounting for the remaining ~32% of the quarter. Surprisingly, with 12 beats & 7 misses by an average spread of 3.5 and (-1.7) points respectively, all of this morning’s updates to guidance were to the upside. Major increases to EPS guidance for the first quarter came out of TGT, ROST & TJX. For the second time in a row, TGT comp’d positively in all of its major categories in over a year with Food & Apparel accelerating sequentially (19% & 19% of sales respectively).

Below are the changes to first quarter guidance out of TGT, ROST & TJX:

  • TGT:  Increased EPS to $0.96-$1.02 vs. $0.98E (up from $0.88-$0.98)
  • ROST: Increased EPS to $0.89-$0.91 vs. $0.88E (up from $0.82-$0.86)
  • TJX: Increased EPS to $0.51-$0.52 vs. $0.48E (up from $0.45-$0.47) 
  • M: increased comp guidance for the combined March-April period to +4.3%-4.5% vs the prior +3%-3.5%. The increase implies that April is expected to come in around +1%-1.2%. Based on April coming in-line with expectations, M’s first quarter comp would come in near +4.5% vs. +3.9E. This is a positive read through into PVH with Macy’s its largest customer accounting for 9.4% of sales in 2011. PVH remains one of our favorite large cap longs in 2012 behind our Top 3 – see our recent note "PVH: Levers and Drivers". 
  • GPS: March Comps were +8% vs. +4.4%E on the heels of an upside surprise in February after months of posting misses and “less bad” numbers. These results suggest new product out of GPS’s international creative facility in NYC is gaining traction. While the underlying 2-year trend slowed across all of GPS’ domestic segments, this was the first month where every concept comp’d positively since March 2010 and will get investors thinking about $2+ in earnings power. While the near-term setup here is bullish, our TAIL call remains bearish based on an increasingly stressed share repo model and underinvested infrastructure. 
  • COST: missed expectations for the first time in 2 years +6% vs. +6.4E. Gas benefited comps by 1 point in the US while FX headwinds resulted in a 50bps detriment to growth. Though Electronics remained down MSD, all of Costco’s major categories were up with softlines (10% of sales) the outperformer up LDD. 
  • Category Performance: Consistent with the timing shift of Easter (April 8th this yr vs. April 24th ly) children’s and footwear were common categories highlighted as outperformers during the month. TGT cited particular strength in both boy’s and girl’s with toys also strong. ROST mentioned juniors and children’s shoes as the strongest merchandise categories. Footwear was +18% at BKE and mentioned positively at ZUMZ who also highlighted Juniors as an area of strength in March, though boys comp’d down. On the high end, JWN also saw strength in children’s. Additionally, consistent with what we’ve been seeing, designer handbags were of the strongest categories at both JWN & SKS.

Longs: URBN, LIZ, RL, NKE, PVH

Shorts: KSS, HBI, HIBB, VRA

Casey Flavin

Director

Matthew Darula

Analyst

Retail: SSS Not Good Enough - blended SSS high low spread chart

Retail: SSS Not Good Enough - total SSS

Retail: SSS Not Good Enough - industry SIGMA

Retail: SSS Not Good Enough - TGT Monthly Grid