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Retail Trade: Back-To-School Barometer

With the RTH up about 32% over the past 6 months, how should you trade retailers through the end of the year?

On Thursday investors will be sifting through the latest same-store sales results for clues about how to trade going forward.

The results could really move the sector because retail stocks have rallied sharply since early March, helped by cost cuts that offset falling sales.

Investors will now be looking for signs that consumers, who account for about 70 percent of U.S. economic activity, are starting to open their wallets again.

“It's going to be watched very closely," Ken Perkins, president of Retail Metrics Inc, says. Investors want to know if discretionary spending picked up last month.

But it’s not just past spending trends that matter. Investors will also be trying to interpret what the results suggest about the all-important holiday shopping season, which is right around the corner.

“Back to school should be a good barometer for holiday,” Citi retail analyst Kimberly Greenberger tells Fast Money. "Historically we find there's up to a 65% correlation between back-to-school and holiday sales."

"If there is an uptick, then the holiday season could have a chance at a modest season, not just an absolutely terrible one like (retailers) had last year," Perkins says.

So what’s the number to beat? On average, analyst expect to see a decline of 3.8 percent in sales at stores open at least a year, according to Thomson Reuters data.

Anything better than that should be viewed positively.

And if the numbers come in weaker than expected don't write off the holiday season just yet. "This year we may have to wait for September sales (to make a determination about the holidays). With a later Labor Day a solid portion of back-to-school sales are being pushed into September," reminds Greenberger.

In other words the two months may have to be taken together before the data becomes meaningful.

In the meantime what's the best retail trade?

Our favorite retailers are Urban Outfitters and J. Crew, says Greenberger. Both retailers are out-executing the competition. However retailer are likely to consolidate in the near term before moving higher so I think you can ease into both stocks over the next 4 to 5 weeks, Greenberger counsels.

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