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Tickers in this Article: BBY, ANF, AEO, TGT, JCP, ARO, HGG
Retail sales fell a sizable 1.2% in May, the largest decrease in eight months, according to the U.S. Census Bureau. The large drop in sales brings back concerns about the sustainability of an already shaky recovery and increases fears of a double dip recession.

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Fall in Consumer Spending
Consumers trimmed their spending on non-essential goods ranging from electronics to clothing and the impact was felt by many retailers. In addition, the June CPI report showed price levels in the U.S. economy fell by 0.2% in May, accelerating from a 0.1% decrease in April. This may be concerning for investors from a deflationary standpoint should the trend persist. (For some background on investing in retail, read Analyzing Retail Stocks.)

Despite the large aggregate drop in sales, some retailers continue to report respectable results in this unstable economic environment. Some of these retailers are shown in the table below:

Company Ticker Same-Store Sales (MRQ)
Aeropostale ARO +8.0%
American Eagle AEO +5.0%
Best Buy BBY +2.8%
Target TGT +2.8%
JCPenney JCP +1.3%
Abercrombie & Fitch ANF +1.0%
Hhgregg HGG -4.8%

Retail's Important Metric
Same-store sales is one of the most important metrics to look at when analyzing retail stocks. This metric reveals how a company's sales are doing by separating out the growth of a company's sales attributed to the opening of new stores and showing the organic growth that is due to increases in market share, better products or more successful selling practices.

Looking at the table, you can see at the top end that some retailers like Aeropostale and American Eagle saw excellent increases in same-store sales in the most recent quarter at +8% and +5% respectively. On the other end, electronics retailer Hhgregg posted a poor metric (ending March 31, 2010) with a decrease of 4.3% in same-store sales.

Best Buy

Although Best Buy posted a relatively decent first quarter, yet the stock took a 7% haircut. Best Buy's revenue increased 7% to $10.8 billion while same-store sales increased 2.8% in stark contrast to a negative 4.8% for Hhgregg. The key part of the earnings release was the fact that they were maintaining their guidance for fiscal 2011. Management's confidence in the guidance is a positive for investors and if met will mean the stock is currently undervalued and may be an opportunity for entry into the stock. Further signs of management's confidence in the company include the repurchase of 2.5 million shares through the first quarter of fiscal 2011. (For further reading on retail sales and investing, read Using Consumer Spending As A Market Indicator.)

Bottom Line

Retail companies are good businesses to invest in at the start of economic recoveries because of their dependence on consumer spending. However, investors should also be cautious of investing in retailers because of the negative macroeconomic data being released such as falling retail sales and CPI. A wait-and-see approach to see if retail sales and unemployment improve should be the first step before investing in any cyclical stock. (For more stock analysis, take a look at Finding Airline Alternatives.)

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