By  on August 27, 2007

Stocks closed higher on Friday after several key economic reports came in better than expected, boosting investor confidence in the economy's overall health.

The Commerce Department reported a better-than-forecast rise in the rate of July new home sales, which rose 2.8 percent above June on a seasonally adjusted annual basis. Year-over-year, however, July 2007 new home sales fell 10.2 percent.

The Dow Jones Industrial Average rose 1.1 percent to 13,378.87; the S&P 500 added 1.2 percent to 1,479.37; the New York Stock Exchange gained 1.4 percent to 9,607.04, and the Nasdaq increased 1.4 percent to 2,576.69.

The S&P Retail Index closed last week up 2 percent to 481.54, buoyed by retailers' solid second-quarter results because of strong sales gains on summer clearance and back-to-school promotions.

Looking forward, some analysts see tough times for some retailers because of challenging year-over-year comparisons and potential consumer spending pressures — but pointed to company-specific positives that will help ease the impact.

Brean Murray Carret & Co. analyst Eric Beder noted that, despite posting in-line earnings, Aéropostale Inc. guided below consensus estimates for the company's 2007 third quarter based on expected tempered margin gains.

"We believe it will become increasingly more difficult for the Aéro apologists to pitch ARO as a superior growth story, especially with store growth prospects shrinking and no new concepts on the horizon to whet investor hype," Beder said in a research note.

Needham & Co. analyst Christine Chen disagreed and reiterated her "buy" rating of Aéropostale shares. Chen sees a new growth phase marked by more sophisticated product, inventory planning and promotions for Aéropostale.

"Incorporating fashion basics and veneer has improved the store experience and brand image; investing in key categories within a more edited assortment has led to better inventory control and enabled ARO to utilize its promotional muscle selectively," Chen said in a note. "We think b-t-s merchandise is fashion-right and believe that strong sales momentum and margin expansion should continue during FY07."

Limited Brands Inc. brought in positive reviews after the retailer doubled its second-quarter income and said it was "comfortable" with consensus estimates for the rest of 2007.CL KingCQ & Assoc. analyst Mark K. Montagna noted that the company can now focus on Victoria's Secret, LaSenza and Bath & Body Works as it completed its capital and operational restructuring.

"We expect that the late floor sets just before Christmas will aid Q4 EPS — last year, the company's sales tanked just before Christmas," Montagna wrote in a note. "A key component will be the pre-Christmas delivery of spring product, which we believe is necessary for any retailer to be successful this holiday season."

Lazard Capital Markets analyst Todd Slater said Limited is emerging as a leaner, higher-margin growth company.

"We believe there is no better time to enter this stock than now, in front of a major transformation, a low multiple, easy compares in 2008 and another in a series of stock repurchase programs," Slater said.

Companies set to report earnings this week include Brown Shoe Co., Chico's FAS Inc., Citi Trends, Coldwater Creek Inc., Delia's Inc., Gottschalks Inc., Fred's Jo-Anne Stores Inc. and Payless Shoe Source.

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