By  on July 16, 2007

Retail stocks sobered up Friday, a day after better than expected June same-store sales spurred a rally that prompted the broader markets to post record gains. The results bettered Wall Street's low expectations based on consumer spending concerns because of high gas prices and a slowdown in the housing market.

The S&P Retail Index ended the trading week up at 528.54, rising 0.29 percent.

The U.S. Department of Commerce on Friday said June retail and food sales fell to $373.9 billion, down 0.9 percent from May, but up 3.8 percent from the year-earlier period.

"We view [Thursday's] strength in retail equities as more of a temporary rally than the beginning of a more constructive move, given the high degree of pessimism that had been built into expectations," Jefferies & Co. Inc. analyst Timothy Allen wrote in a research note. "While the backdrop for equities in general remains favorable, we see a greater probability of disappointing consumer-related data in coming months."

Allen noted that while retailers are reporting "pockets of strength," the general outlook for July same-store sales remains mixed because of the recent rise in interest rates, a more stringent lending environment and the housing market's correction.

But Telsey Advisory Group's Dana Telsey painted a more optimistic picture for the July comps period, citing "healthy" June results and expected strength in fall merchandise, both of which she said had tempered concerns for now.

"Retailers should benefit from the calendar shift resulting from the 53rd week last year, 23 tax-free days versus eight last year, and a mix of wear-now and new back-to-school product," Telsey wrote in a note.

Citigroup analyst Deborah Weinswig also pointed to the calendar shift to support her expectation that July will be a "very strong month."

"Specifically, retailers had a week of clearance moving into June and will have a week of back-to-school moving into July," Weinswig wrote.

But Jefferies' Allen warned that potential erosion in consumer-relevant data might take several months to be felt.

"A year ago, when interest rates on 10-year bonds and 30-year mortgages rose to similar levels as today during the April/June time frame, the negative affect was not fully seen until a few months later," said Allen, who noted that weakness in housing turnover, as well as consumer spending and confidence, was seen in June following peak rates.Bear Stearns analyst Randal Konik listed five reasons to avoid shares of Urban Outfitters Inc.: business model concerns, unrealistic long-term growth and margin expectations, near-term earnings risk, overly positive analyst sentiment and valuation. "Despite being down 20 percent in the past 45 days, we think there is still room for another 20 percent correction," wrote Konik.

At Susquehanna Financial Group, analyst Thomas Filandro noted that negative traffic continued to hamper Gap Inc.'s performance and wrote that with no fall TV advertising campaign planned at the Gap division, "we remain concerned that shopper traffic will remain muted."

Robert W. Baird & Co. analyst Mitch Kummetz noted that Pacific Sunwear of California Inc. was on track to report mid-single-digit comps for the quarter after good, but promotion-driven, June same-store sales numbers. "We don't doubt that the company's business is getting better, but the shares aren't inexpensive unless there is a lot of upside to the numbers, which we don't happen to believe to be the case," Kummetz wrote.

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