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Retail Round-Up: Show Me the Stimulus

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Stores still waiting for checks to be cashed.

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Last month's retail results were so dismal, so generally uninspiring in every way, that I chose to write instead to write about the Masters golf tournament. I told readers I liked Wal-Mart (WMT), Costco (COST) and Home Depot (HD) (up 5%, 9% and 3.2% since, respectively, for those scoring at home) and moved on to a weepy story about Jack Nicklaus. I stand behind that decision.

Now, somewhat ironically given that we're entering the slowest part of the retail year - the slog between Easter and Back to School - the retail picture is slightly more interesting. In the last month we've had the distribution of billions of dollars of government checks. Literally every taxpayer in America below a certain income level has been given money. The retailers, being retailers, are capitalizing on the government's moves by offering bonus gift-cards for shoppers redeeming their entire check right at the stores.

In terms of nuanced ways to go about encouraging consumption in the American consumer, "sending money directly" is to stimulus what "punching someone in the Adam's Apple" is to a witty insult. What it lacks in subtlety it makes up for in brutal effectiveness. Americans will, in fact, spend money that arrives in their mailboxes with little to no explanation. I don't offer this opinion as a snooty slight on the state of economic planning but rather an utterly obvious observation of the human condition.

The checks started arriving at the very end of the sales just reported and retailers ended their quarters April 30th. This timing confluence means the stimulus will still be abstractly "in the future" in regards to the numbers we see today and the quarters which will get reported over the next few weeks. As a result, we're somewhat back to where we were a month ago, only without a good golf tournament to discuss instead.

Sticking to the names I liked before, Wal-Mart came in better than expected. Costco did as well, but the number is somewhat tainted by gas prices (Costco sells a lot of gas) and international sales, which normally don't count. Home Depot doesn't report SSS but I see nothing to change my generally favorable opinion of the chain. On the stock side, I rather expect a pullback on Costco and, if it's deep enough, I'd use the opportunity to get long. I'd love to see a pullback on Wal-Mart but as Mick once sang, you can't always get what you want. Adjust accordingly.

As for the names I don't like, department stores are slightly soft with the exception of Saks (SKS), which makes no sense to me at all so I'll ignore it. Target (TGT) continues to be a baffling case of Mojo Gone Missing. Gap (GPS) missed by nine-miles but is up pre-market due to terrible expectations. Best Buy (BBY) doesn't announce SSS but did announce an investment in a company called CarPhone Warehouse (only slightly less confusing, as an initiative, than Saks' results). I'd avoid all of the above spaces.

Among the impressive surprises is BJ's (BJ) the former weak-sister of the club stores suddenly putting up insanely great comps, a trend we've touched on previously in this space but not to the extent they seem to deserve. Another jaw-dropper: Aeropostale (ARO), a name loved by Professor Jon Najarian on last night's Fast Money, raised its outlook, which is the sort of thing companies do when they post 25% comp store sales results!

I'll have more thoughts both in print on the TeeVee later today. The early take-away is this: If my choice is to short a sector based on a catalyst the entire world not only already knows but has had beaten into their heads ceaselessly (honk your Escalade if you're tired of talking about gas prices), or get long a sector based on an abstract but certainly effective stimulus effort in the pipeline, I'll choose the more bullish side of the trade.

Stick with the winners and stay lower-end unless you feel confident you can catch an ARO comeback. I don't want a portfolio full o' retailers but I don't mind going on the record saying I continue to like Costco, Wal-Mart and Home Depot, especially if I can buy 'em on dips.

No positions in stocks mentioned.

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