By  on June 11, 2007

Although May same-store sales came in better than some observers expected, Morgan Keegan analyst Brad A. Stephens said June was shaping up as a tough month for retailers.

As a result, Stephens is favoring apparel suppliers with "limited department store exposure," such as Phillips-Van Heusen Corp. and Warnaco Group Inc., as well as more powerful brands such as Calvin Klein and Polo Ralph Lauren.

In a research note Friday, Stephens said talks with apparel buyers last week "lead us to continue to be cautious on apparel names. Retailers are demanding higher give-back, higher advertising co-op and are forcing the apparel companies to hold goods longer. This is the most aggressive posture we can ever remember buyers taking with their apparel counterparts."

The analyst said May Department Stores Co.'s same-store sales "results were the second-weakest month in over a year. Further, four out of our eight monitored department stores posted negative comps. With May comps experiencing a positive calendar shift, the June consensus outlook is rather bleak with three out of the four companies [Kohl's Corp., Nordstrom Inc. and Saks Inc.] that posted positive comps in May expecting June's results to run significantly weaker/negative."

Stephens said for apparel stocks to go substantially higher, "department stores need to deliver comp/earnings per share upside. Therefore, we expect muted apparel company returns over the next few weeks/month as June is expected to be soft."

Thomas A. Filandro, analyst at Susquehanna Financial Group, said in a research note that consumers were facing headwinds, "including higher gas prices, an uncertain housing market and mixed overall confidence," which were weighing down shoppers' "enthusiasm to spend."

The analyst said consumers were "clearly focused on sale merchandise, which will likely accelerate during the remainder of the commodity summer selling period."

As tracked by WWD, same-store sales in the department store sector rose on average 5.3 percent for May. Mass merchants had a 4.1 percent average comps gain and specialty stores posted a 0.5 percent average increase.

Results were in line with analysts' expectations of strength in the luxury channel and softness at moderate and low-priced retailers.In apparel, dresses, knit tops and shorts were important items for May, and analysts expect these segments to be key in the early back-to-school season.

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