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Recession Concerns Expected to Hit Comps

Wall Street had the jitters on Tuesday, but rebounded in afternoon trading.

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Wall Street had the jitters on Tuesday, but rebounded in afternoon trading.

The Dow Jones Industrial Average sank more than 200 points earlier in the day after Merrill Lynch lowered its full-year earnings guidance for Citigroup. The Dow closed down 0.4 percent to 12,213.80, while the S&P Retail Index closed up 0.1 percent to 388.87. The broader S&P 500 grew 0.3 percent to end the day at 1,326.75.

Looking ahead, sluggish consumer spending due to recessionary fears are expected to squelch February same-store sales, which are scheduled for release on Thursday.

Analysts are generally predicting lackluster results across the board. The teen sector could hold up best as spring break fueled a demand for warm-weather apparel, resulting in an improvement in sales from January, said Thomas Filandro, analyst at Susquehanna Financial Group.

"We continue to view teen retail as a subsector that can show relative out-performance. In addition to a customer [who] is at least somewhat insulated from many of the current macro difficulties, we believe there are upbeat and new fashions in the mall, which can help drive customer traffic into stores," said Howard Tubin, analyst at RBC Capital Markets.

Aéropostale Inc. is expected to be the biggest winner in the sector as the retailer continues to improve merchandise assortment by adding more color and fashion items to its mix. Todd Slater, analyst at Lazard Capital Markets, forecasts an 8 percent jump at the company.

"Customers have responded positively to the brand's [Southern California]-inspired aesthetic and styles that evoke a Hollister feel, featuring bright colors, palm tree motifs and slimmer fits. Aéropostale's low price model could be stealing share from trading-down consumers," he said.

Aéropostale's success could pose a threat to Abercrombie & Fitch Co.'s Hollister division and American Eagle Outfitters Inc.

Slater predicts a 2 percent drop at Abercrombie and 3 percent decline at American Eagle.

Off-price retailers, such as TJX Cos. Inc., may also fair well in the economic downturn. Slater forecasts a 4 percent increase at the discounter.

"TJX continues to benefit from its flex-spending strategy, abundant supply chain and consumers trading down. Lean inventory levels should translate to further favorable product acquisition opportunities," he said.

But the Boomer market remains in the doldrums, with little newness and more women holding off on self-purchases.

"Consumers are faced with an uncertain macroeconomic environment, a critical presidential race and increasing fuel and food costs, none of which seem to be abating in the near term," said Richard Jaffe, analyst at Stifel Nicolaus.

Aggressive promotional activity at AnnTaylor Stores Corp. has led Roxanne Meyer, analyst at Oppenheimer, to predict a 4 percent slide at the company. Chico's FAS Inc. is estimated to be down in the mid-double-digit range by Liz Pierce, analyst at Roth Capital Partners.

Gap Inc. is expected to report flat comps as the company continues to focus on margin expansion instead of topline growth, Slater said. By division, he expects a 2 percent drop at Old Navy, flat at Gap brand, and a 6 percent increase at Banana Republic.

Limited Brands Inc. recently lowered its February same-store sales guidance. The company now expects a 10 to 12 percent drop compared with a previously forecast 6 to 8 percent decline.

In the department store sector, Kohl Corp. is expected to report comps results within the company guidance of a 3 to 5 percent decline due to unfavorable weather, according to J. David Cumberland, analyst at Baird.

Target Corp. has estimated comps between negative 1 and positive 1 percent, due to slightly higher markdown activity in discretionary areas like apparel, soft home and beauty. Wal-Mart Stores Inc. guided comps in the range of flat to 2 percent.

Saks Fifth Avenue is expected to be down 2 percent, compared with last year's 25 percent surge, according to Slater.

While February is expected to be weak, it also remains a relatively unimportant month.

"The March-April selling period will be the first true test of what the American consumer will be buying in this current gloomy environment, and should also provide deeper info on the acceptance of key spring fashion trends," said Eric Beder, analyst at Brean Murray, Carret & Co. LLC.