Highlights include Wal-Mart Stores, Inc. (WMT), Abercrombie & Fitch Co. (ANF), Aeropostale, Inc. (ARO), Macy’s, Inc. (M), down 9% vs. down 8% and Hot Topic, Inc. (HOTT).

April retail sales were better than expected, with about 60% of retailers beating forecasts. That is an improvement from March, when about half of the retailers beat forecasts.

Our sample of 20 retailers reported that April sales increased 1.7%, including Wal-Mart (WMT), but decreased 2.6% excluding Wal-Mart. Among those retailers beating forecasts were Wal-Mart, up 4% vs. expectations of up 3%, Abercrombie (ANF), down 22% vs. down 28%, and Aeropostale (ARO), up 20% vs. up 9%. Those retailers that fell short were Macy’s (M), down 9% vs. down 8% and Hot Topic (HOTT), up 3% vs. up 7%.

Retail sales have stabilized from the awful 2008 holiday season, but overall sales trends remain negative. Retailers are also doing a pretty good job of managing expectations. That combination should enable retailers to report better-than-expected earnings later this month. But those earnings report may not be enough to push retail stocks higher in the second quarter.

Retail stocks are up huge so far this year. As measured by the S&P Retail Index [RLX], retailers are up over 27% year-to-date, well above the overall market.

However, there are headwinds that may prevent the RLX from moving higher. The first is that the second quarter 2009 was aided by stimulus checks that went directly to consumers. Second, while gasoline prices are down a great deal from year-ago levels, they have been moving higher in recent weeks. Third, unemployment is still rising and wage growth is non-existent, leaving consumers with fewer dollars to spend. Fourth, during the rally of the last two months, several single-digit retail and apparel stocks with high short interest, bloated balance sheets, and deteriorating business trends generated gains above 100%. Those stocks are due to sell-off hard, unless they are able to show that a recovery is close at hand.

That said, there is one trend that investors should focus on. Consumers continue to trade down to cheaper alternatives, and that trend will remain with us even after the economy recovers. That points to further market share gains by mass merchants and discount stores at the expense of more expensive and middle-of-the-road retailers.

Read the full analyst report on “HOTT”
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