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TWST: Eliot, it’s been reported that retail sales overall were up, I believe, 3.4% in January. Tell us what that means.

Mr. Laurence: For apparel retailers the primary insight garnered from strong January sales is that December must have been very disappointing. When retailers don’t sell enough of their inventories prior to Christmas, they must mark them down aggressively in January. Consumers have enough experience to understand this necessity. If they see heavy inventories in department and specialty stores in mid-December, they recognize that capitulation markdowns are imminent. They will be able to buy the products they desire 50% cheaper in January. However, strong January clearance sales do not necessarily tell us anything about consumer spending plans for the spring selling season.

TWST: Eliot, how about the companies that you follow? Are there any that are poised to beat analyst estimates, and are there any that are likely to post disappointing results?

Mr. Laurence: I think, generally speaking, Regulation FD has gotten companies to report on sales release days, any incremental information on earnings numbers. For those companies outperforming expectations on a comparable store sales basis, like American Eagle Outfitters (Nasdaq:AEOS), there is a relatively high probability of a modest upside EPS surprise. By this point in February, those companies that had negative sales surprises have generally informed investors. Moreover, investors really don’t care one way or the other what the final EPS number is, as long as the company can make a credible claim that its inventories are reasonably clean heading into the spring selling season.

TWST: Eliot, which management team would you single out for overall excellence?

Mr. Laurence: You know, I’ve covered these companies for an extended period of time and noticed a fairly frequent pattern: companies will capture magic in a bottle and have tremendous success and then slowly lose it and have to rediscover it again. This back-to-school season, I was awed by the performance of American Eagle Outfitters. The company had a terribly difficult spring-summer selling season. Given the fact that it is a vertically integrated, private label retailer with very long lead times, the potential of a short-term turnaround was close to nil, yet not only did it reverse its sales momentum in the back-to-school selling season, but it did so against extremely difficult five-year comparable store sales performance. I would say that this company, which as recently as five years ago had a mixed reputation in the industry, has established itself as the premier company, not only because it turned its business around, but because of the broad-based strengths of the operation from merchandising to marketing to store operation. There are a lot of subtle things that American Eagle Outfitters has done to create and sustain its success.