UNEDITED

Retail sales in January slipped 0.3% from December, excluding autos, sales increased 0.6%. On a year-over-year basis, retail sales advanced 4.5%, this was the slowest pace since August 2003 on a year-over-year basis. The retailers that experienced the fastest growth were those selling building materials and gas stations, which increased sales by 10.8% and 14.6% respectively. Merchants of furniture and electronics saw sales decline by 0.2% and 1.2% from last January. These were the first declines since the spring of 2003, when the war in Iraq started. Looking at the ICSC data, consumer spending has not rebounded. Last week, chain store retail sales increased 1.7% from last year; this was the slowest pace of same store sales growth since July 2003.

Nordstrom's fourth quarter earnings were a penny better than consensus estimates due in part to higher gross margins. Gross margins improved almost 80 basis points, which was much higher than the 25 to 30 basis point increase that management guided to. Same store sales increased 7.2%, which helped leverage SG&A expense by 160 basis points. Operating margin increased by 243 basis points to 12.3%. The company expects gross margins to only increase another 10 to 20 basis points in 2005 with another 40 to 60 basis points in SG&A leverage. For the full year, Nordstrom's gross margin was the highest it has been in at least 18 years and operating margin was the best since 1989. The company believes it can extend this improvement in margins over the next three years by 200 basis points. It said the Southern states was the best performing region and children's and woman's shoes, accessories, junior woman's and men's apparel were the best performing categories.

Abercrombie & Fitch reported earnings of $1.15, which was were two cents higher than Total sales increased by 23% driven by a 9% increase in same store sales coupled with an increase of 15% is square footage. While, gross margins increased by 246 basis points, SG&A expense ballooned 517 basis points. The bulk of this increase (310 basis points) was due to increased staffing to "improve the look of our stores, through better presentation and service." Another 150 basis points was due to incentive bonuses. Over the past several years, Abercrombie has been slashing costs to drive earning growth. After realizing that those cuts might have gone too deep, the company increased investment in its stores, in both staffing and fixtures. The company expects this investment to drive same store sales growth by 9% to 10%. Wall Street is under the impression that the company is committed to this strategy and is concerned that it will be slow to react if sales start to wane. If same store sales growth decelerates, the company will maintain the higher expenses causing margins to compress. Considering that its monthly same store sales increased more than 5% just once between 2000 and September 2004, Wall Street has good reason to be concerned.

Ann Taylor announced that it will lose $0.14 to $0.18 per share, which is quite a bit lower than the breakeven to four cents per share the company previously expected. While there were some charges that the company is taking that negatively impacted results, the main driver for the sub-par performance was due to weak comparable store sales. Patrick Spainhour, chairman of Ann Taylor, explained the reason for the short fall in a press release.

"Fall merchandise was not well received at the Ann Taylor division from the start, and as we entered the holiday season, it remained heavily promotional. Additionally, our holiday merchandise was not as well received as we had expected and as a result, our promotional cadence was accelerated throughout the quarter. While our January POS promotion started the month with strong volume, it waned throughout the month, negatively impacting fourth quarter earnings by more than we had originally expected."

February results have not picked up as the company expects same store sales are "expected to be high single-digit negative." Even with the heavy promotional activity, inventories increased by 10% on a per-square foot basis. It's likely that Ann Taylor will continue having quite a few sales.

Margins were also pressured at Jones Apparel. Peter Boneparth, President and CEO, described the quarter as, "more challenging than we has anticipated. Higher levels of promotional activity were utilized to stimulate consumer purchasing, pressuring gross margins and the level of our profitability in the period. The promotional activity was not isolated to any one of our business segments, though it was more prevalent in out wholesale better apparel and wholesale footwear and accessories businesses." Its better apparel segment actually lost money on an operating basis. Merrill Lynch described this as "almost inconceivable." I guess Nordstrom's does not sell a lot of Jones Apparel merchandise.

After reviewing fourth quarter earnings for the homebuilders, it should come to little surprise that housing starts jumped to 2.159 million from 2.063 last month and 1.934 last January. Not only was this considerably higher than the 1.925 economists expected, but was the highest level of starts since 1984. Building permits also jumped higher then expected. The number of permits issued increased to 2.105 million which is within 100,000 of the 30-year high set in July 2004.

After consumer spending slowed prior to the beginning of the Iraq War, it has been robust since the summer of 2003. There have been a few signs that show consumers are starting to tire, however, it is difficult to believe spending will materially slow with housing remaining strong and banks pushing home equity loans. This of course is tied to interest rates, which have started to increase and are likely to keep increasing.