Ms. Greenberger: We're feeling near-term cautious about the group, its record sales numbers during Q12004, and also about the record operating margins for most retailers in 2004. Here in the near term, we're having a difficult time finding a catalyst to drive the stocks higher, particularly given that the sector is now trading at about a 5%-10% multiple premium to the S&P 500 when it has historically traded for a 20%-25% discount multiple to the S&P 500. The valuations are feeling sort of full, and as far as the near-term catalysts, we have some risk that against the first quarter comparisons, comps could come in a little on the light side. And against record-high margins, we're just not seeing a lot of near-term upside to the earnings estimates. As we get further into the year, we get far more constructive and certainly think that, particularly given that retail started to slow down in the June time frame last year with the ramp up in oil prices, the second half of the year is looking much more interesting for the stocks.
TWST: Gabrielle, how about your perspective as we look out at 2005?
Ms. Kivitz: We're also maintaining a somewhat selective viewpoint with
respect to our recommendations. I really take a bottom-up approach. The
theme we've been talking about is sticking with names that are showing
strong pricing power. Pricing power comes from a combination of having
the right product and strong execution and should really lead to strong
top line and margin performance. But echoing what Kimberly just said,
valuations are not necessarily low. The PEG ratio for our group, based
on our estimates, is 1.2. Strong performers are getting premium
multiples, but companies that have had challenges are also trading at
premiums and, in some cases, even higher premiums than the strong
performers as the market is discounting some improvement in these
businesses. I do think there are some opportunities for second half of
the year turnarounds, but for now we're really sticking with that theme
of strong pricing power.
Tickers included in this excerpt: AEOS, ANF, ANN, ARO, BBBY, BEBE, CHIC, CHS, CWTR, GADZQ, GPS, JCP, JILL, JWN, KIRK, LTD, MOSS, PLCE, PSUN, TLB, TOO, URBN, WTSLA
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