The below table suggests that the chain’s modest ‘success’ over the prior four quarters may have been simply a function of easy comparisons and less a function of a long-term trend.

The Old Navy North American division reported 20 consecutive quarters of comp store sales declines between Q3 2004 and Q2 2009.  Therefore, the current quarter represents the ‘end’ of easy compares and the -2% comp store sales result in August 2010 has the potential to be a permanent return to negative/dismal comp store sales.     

Old Navy Quarterly Comp Sales Run Rates

L.A. Anti-Counterfeit Sweep Brings 30 Arrests
Posted: Wednesday, September 1, 2010
Source: WWD
Are the Feds starting to finally crack down on these folks?  Feds suggest a trend of criminals switching from narcotics to intellectual property crimes.

Retailers Show Surprising Strength in August Sales
Posted: Thursday, September 2, 2010
Source: WSJ
Is it strength when most retailers delivered results in August that were within 100 Bps of their results in July?  Is it strength when retailers benefited in August via more tax-free days and earlier BTS start dates in California?  Is it strength when most retailers reported average unit retail (AUR) declines that imply a heavily promotional environment?  Are the top-line results in August a mirage?

Burger King Agrees to 3G Capital Offer
Posted: Thursday, September 2, 2010
Source: WSJ
While the chain continues to get trounced here in the U.S., 3G pays a 46% premium in a highly leveraged transaction for growth in Latin America?  How do you say “sucker” in Spanish?

EEOC Files Charge Against A&F Over Hijab
Posted: Thursday, September 2, 2010
Source: WWD
The store manager wrote a note on the application (“not Abercrombie look”) during the job interview.  The applicant could not have received a more glowing appraisal!

The biggest question today relates to whether sales were pulled forward into fiscal August versus fiscal September.  A few companies (e.g. AEO, ROST) have suggested that it expects comp store sales to soften as the quarter progresses (are these softer expectations related to the “pulling forward” of sales or tougher comparisons?).  

• Many retailers explicitly suggested traffic trends were strong.  But, many of these same retailers suggested that average unit retails (AUR) declined versus LY.  Promotional activity is still the predominant theme at the mall today.
• Internet sales growth is slowing versus 1H 2010.  Only a few retailers reported Internet sales growth for August 2010 versus LY (JWN reported a meager +3.7% increase versus LY and KSS did not even bother to report the metric this month).  
• No companies adjusted their quarterly earnings expectations (typical since earnings season ended last week).  Next month will be action-packed (i.e. many EPS guidance revisions).   
• End of month strength or weakness?  BJ again reports negative comp store sales in week #4 (same as last month).  Yet, most retailers again suggest that week #4 was their strongest sales week of the month.    
• COST reports “slightly higher” food inflation in August 2010 versus LY.  This was less than July 2010’s disclosure of a +1.0% increase versus LY.    
• COST discloses that its Majors category (i.e. electronics) was “slightly negative” in August 2010 versus LY.  Televisions were again negative offset by strength in audio, cameras, navigation, and cell phones.   
• GPS reported a -5% traffic decline at the core chain in August 2010 versus -3% in July 2010.  Conversely, many other retailers disclosed higher traffic counts than LY (e.g. COST, FRED, KSS, TGT, TJX, and ZUMZ).  Gosh, even HOTT delivered flat traffic at its core chain.
• Our Compology this month is measuring relative top-line strength/weakness by comparing the comp store sales results in August 2010 versus July 2010.      
   

The following retailers reported relatively stronger comp store sales in August 2010 versus July 2010 (relative strength/improving trend): 

SMRT (+11.1% improvement in August 2010 versus July 2010)

BKE (+5.8% improvement in August 2010 versus July 2010)

WTSLA (+5.3% improvement in August 2010 versus July 2010)

The following retailers reported relatively weaker comp store sales in August 2010 versus July 2010 (relative weakness/worsening trend): 

SKS (-5.4% decline in August 2010 versus July 2010)

BONT (-4.3% decline in August 2010 versus July 2010)

• Looking Ahead by Looking Back… What happened in September 2009? 
  In September 2009, many retailers reported that comp store sales were stronger than expectations.

Retailers benefited from (1) the shift of Labor Day versus the prior year, (2) the lack of two hurricanes versus the prior year, and (3) weather that was conducive to sales of Fall apparel and accessories.  Teen retailers were the weakest performers in the month.      

No retailers explicitly reported merchandise margin weakness in September 2009.

Also, while grocery deflation was suggested as providing a material headwind at COST and BJ during the month, top-line pressure was decelerating. 

Week #2 was generally considered to be the strongest fiscal week in September 2009.  Week #3 was generally held to be the weakest.    

The Northeast, Mid-Atlantic, and Southwest were generally held to be the strongest comp store sales regions in September 2009.  The West was generally held to be the weakest comp store sales region in September 2009.

We like to track the Facebook activities and monthly fan base growth for the retail sector.  Click here to see our compilation of monthly Facebook ‘fan’ numbers.

It is worth noting that out of the 70 retail brands covered in this survey, New York & Co (NWY – $2.01) was the largest percentage gainer of ‘fans’ in August 2010 versus July 2010 with a +88.4% gain.  Amazingly, Kohl’s (KSS – $48.22) was next at +66.2% growth in August 2010 versus July 2010. 

Conversely, Sears (SHLD – $64.42) and Ugg Boots (DECK – $45.59) delivered dismal +0.3% ‘fan’ growth in August 2010 versus July 2010.  Limited Too (DBRN – $21.81), Pizza Hut (YUM – $42.44), and Best Buy (BBY – $32.43) were not much better at +0.4%, +0.6%, and +1.2%, respectively. 

Starbucks (SBUX – $23.70) continues to lead the way by a wide margin with the largest number of ‘fans’ with 13 million (the chain even added an impressive gain of 1.6 million new ‘fans’ in August 2010 versus a month earlier).
 
Facebook Fan Base Highest Percent Growth – August 2010 vs. July 2010

Facebook Fan Base Lowest Percent Growth – August 2010 vs. July 2010

Our 5 long ideas were down -7.2% versus a decline of -8.5% for the RLX index.

Our 9 short ideas were down -19.9% versus a decline of -8.5% for the RLX index. 

We weighted the picks by market cap to preclude a micro-cap selection skewing the results.

On Monday, we again published a report that identified 23 retailers that have material EPS upside/downside in 2H 2010.  Approximately half of the 23 companies are on our Honorable Mention list which indicates less conviction. 

The full list includes the following companies (alphabetical order):

Aeropostale (ARO – $22.79)
Amazon (AMZN – $126.64)
Ann Taylor (ANN – $15.43)
Bed Bath & Beyond (BBBY – $37.00)
Chico’s (CHS – $8.79)
Chipotle Mexican Grill (CMG – $153.03)
Citi Trends (CTRN – $24.21)
Coldwater Creek (CWTR – $4.69)
The Gap (GPS – $17.03)
Hibbett Sports (HIBB – $23.71)
J. Crew Group (JCG – $31.04)
Kohl’s (KSS – $47.21)
Macy’s (M – $19.60)
NetFlix (NFLX – $126.10)
Nike (NKE – $70.94)
Payless ShoeSource (PSS – $14.09)
Ross Stores (ROST – $50.95)
TJX Companies (TJX – $41.13)
Talbots (TLB – $10.70)
Urban Outfitters (URBN – $31.05)
VF Corp (VFC – $73.88)
Volcom (VLCM – $16.06)
Zumiez (ZUMZ – $15.67) 

In 4-6 weeks, we’ll provide the full list again and show you which companies were/are longs and shorts for the next 3 months.  We’ll also highlight which companies made the official list or were simply an honorable mention selection.