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Retail Sales Uplifting, But There's a Catch


Don't load up on this group until you consider the whole story.

No one ever likes to admit they're wrong, including me. But to be completely honest, I was pretty off on my expectations for the holiday season. And boy, am I glad I was wrong.

Rising 1.8%, total holiday sales topped my expectations of a 1% to 2% decline. While shocking, it came as a welcoming surprise as the beaten-down retail industry has been in need of a lift.

For the month of December, total sales were 2.8%. Typical declines from American Eagle (AEO), Saks (SKS), and Nordstrom (JWN) were pleasantly replaced with strong gains. Even Gap (GPS) -- a retailer struggling from more than just economic woes -- posted a slight uptick in sales.

Of course, not every company was off beat. As usual, Abercrombie (ANF) sales plummeted 29% while Aeropostale (ARO) and TJ Maxx (TJX) posted double-digit increases.

Overall, the results were uplifting.

But before you go running off to load up on retailers, let's address some lingering issues within the sector.

First, remember that same-store sales are only a preview. The full story will be found in the quarterly reports where margins will reveal just how hard retailers fought for those sales, and the balance sheet will divulge a clearer picture of inventory levels.

Secondly, let's not forget that this year's holiday sales increased based on 2008's abysmal sales figures. Improvement on top of last year's 5.8% is a comforting sign, but nothing to get overly excited about.

Lastly, while I was too pessimistic about holiday sales, the market has been overly optimistic. Save for December, 2009 was a rough year for retailers. However, the market has been expecting a reversal in falling sales, and as I stated a few weeks ago, far too much near-term optimism is built into retailer valuations right now.

Remember, consumers are still deeply concerned about both the job and economic outlook of the US Consumer; confidence is gradually rising, but with another depressing December jobs report and general concerns with political and economical changes taking place within the While House, I still only view the improved holiday performance as another sign of stabilization. Recovery, particularly in the retail sector, is a long way off.

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Position in AEO.
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