Retail stocks started the year on a strong note as the S&P Retail index outperformed the Dow and S&P 500 and jumped over 18% during the first quarter.

However, sales slowed down in May, reflecting a shift in consumers’ shopping patterns. Consumers are gradually becoming more rational on what they spend and how much they spend. These days, shoppers are spending more on essentials and are looking for value-adds.

Across all income levels, shoppers are ranking value-for-price as the most important reason for store choices. Thus, the retailers are offering trend-right and well-designed assortments at compelling prices, without compromising on quality in order to drive traffic.

According to the National Retail Federation, “May retail sales (excluding automobile, gas stations and restaurants) declined 0.3% seasonally adjusted from April.” However, unadjusted sales increased 4.8% year over year.

The U.S. Department of Commerce noted that “advance estimates of U.S. retail and food services sales for May, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, decreased 0.2% (?0.5%) from the previous month.” However, sales marked an increase of 5.3% year over year.

Coming Down to Companies

Retail, owing to its huge spectrum, remains a lucrative avenue for investors. Moreover, the sector also reflects consumer spending trends, an important parameter to gauge the health of the economy (consumer spending accounts for approximately 2/3rd of the economy).

Thus, considering comparable store sales data becomes quite important as it is an essential indicator of the health of the retailers, providing an insight into future prospects.

Costco Wholesale Corporation (COST) registered growth of 4% in comparable store sales for the four-week period ended May 27, 2012, while the company’s top line increased 7% to $7.7 billion. A differentiated product range enables Costco to provide an upscale shopping experience to its members, resulting in market share gains and higher sales per square foot.

Moreover, the company maintains a healthy membership renewal rate. Costco also remains committed to open new clubs in domestic and international markets. The company’s diversification strategy is a natural hedge against risks that may arise in specific markets. Currently, Costco holds a Zacks #3 Rank that translates into a short-term Hold rating.

Macy’s Inc. (M) reported same-store sales growth of 4.2%. Total sales were up 4.1% to $2.02 billion. Macy’s has been taking prudent steps to increase sales, profitability and cash flows. These include integration of operations, consolidation of divisions and customer-centric localization initiatives.

To help drive traffic, Macy’s continues to focus on price optimization, inventory management and merchandise planning. Macy’s carries a Zacks #3 Rank that translates into a short-term Hold rating.

Nordstrom Inc (JWN) registered a 5.3% increase in same-store sales for May 2012. Total retail sales were $870 million, up 9.3% from $796 million in May2011. Nordstrom maintains a Zacks #3 Rank, which translates into a short-term Hold rating.

Ross Stores Inc. (ROST), the largest off-price apparel and home fashion chain in the U.S., marked an 8% increase in same-store sales in May 2012. Total sales for the four-week period surged 13% to $746 million. The robust sales mirror the company’s relentless focus on offering exciting merchandise driving value-oriented customers. Ross’ shares maintain a Zacks #3 Rank, which translates into a short-term Hold rating.

Target Corporation (TGT) marked an increase of 4.4% in comparable store sales for May 2012. Net retail sales rose 5% year over year to $5.04 billion. Target’s efficient marketing, multi-channel strategy, product innovation, compelling pricing strategy and new merchandise assortments, will drive comparable-store sales and operating margins in the long term.

We expect the company to gain market share, and believe that more focus on consumable items should boost sales and earnings in a sluggish environment. Currently, Target holds a Zacks #3 Rank, which translates into a short-term Hold recommendation.

Limited Brands Inc. (LTD) posted a 6% increase in comparable-store sales for May 2012. However, net sales declined 6.3% to $671.9 million for the period. Limited Brands wants to augment its retail footprint across the globe by expanding aggressively in Canada and other international markets.

The company’s strong liquidity positions it for growth and higher returns. However, stiff competition and erratic consumer behavior remain matters of concern. Limited Brands holds a Zacks #3 Rank that translates into a short-term Hold rating.

Gap Inc. (GPS) reported a 2% increase in same-store sales, a significant recovery from the prior-year quarter. The company posted a 4% increase in net sales for the period. Gap holds a Zacks #3 Rank that translates into a short-term Hold rating.

Saks Inc. (SKS) reported comparable store sales increase of 4.0% in May, with total sales for the four weeks ended May 26, 2012 climbing 3.7% to $215.8 million. Saks currently carries a Zacks #4 Rank (short-term Sell rating), reflecting risks related to the ever-changing demands of the consumers, increased volatility in the financial markets and the overall uncertainty in the macroeconomic environment.

Kohl’s Corp. (KSS) announced that the company’s comparable-store sales for May 2012 decreased 4.2% with total sales declining 2.6% to $1.3 billion. Kohl’s holds a Zacks #3 Rank that translates into a short-term Hold rating.

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