Janney Capital Markets

Over the weekend, we witnessed a slight uptick in mall traffic as the cold weather snap in the Northeast helped drive need-based purchasing.

This past weekend, year-over-year promotional activity was "flat-to-slightly deeper," similar to last week; however, we even noted a few "flat-to-slightly better" (less deep) promotions. We believe October has been challenging for retailers, particularly after Columbus Day and expect comparable-store sales to be below expectations. Despite October's clearance nature, we are concerned with an increase in "deeper" promos year-over-year, especially as inventories were well-controlled entering the third quarter.

Promotional cadence improves sequentially; generally third-quarter-to-date promos have been "flat to deeper," a sequential improvement from the first half. Our weekly promo analysis has suggested the flattening out of year-over-year promotional activity through September, which we deem to be supportive of merchandise margins. However, October has appeared to be more challenging. This past weekend year-over-year promotional activity was "flat-to-slightly deeper," similar to last week; however, we did note a few "flat-to-slightly better" (less deep) promotions, and promotional activity has improved since the worst weeks post-Columbus Day.

With August and September seemingly "okay," October seems below plan; next shopping event Black Friday; for the third quarter, expect weak top line, potentially offset by conservative inventory plans. With October typically a clearance month, and the next significant shopping event Black Friday, we believe retailers must rely on inventory conservatism to preserve merchandise margins and begin to control promotions better on a year-over-year basis. We point out that earnings should be supported by merchandise margin stabilization, though negative comps are likely to continue for many retailers.

Companies likely to make or beat current quarter consensus: American Eagle Outfitters (ticker: AEO); Bebe Stores ( BEBE); Express ( EXPR); Francesca's Holdings ( FRAN); Lululemon Athletica ( LULU); Children's Place ( PLCE); Urban Outfitters ( URBN); and Zumiez ( ZUMZ).

Companies with potential risk to quarter: Abercrombie & Fitch ( ANF); Aeropostale ( ARO); Ann ( ANN); Buckle ( BKE); Chico's Fas ( CHS); Gap ( GPS); New York & Co. ( NWY); and Pacific Sunwear of California ( PSUN).

-- Adrienne Yih-Tennant

-- Gabriella Carbone

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