Brean sees tight consumer spending ahead

Brean Capital analysts said Monday that retailers with tight inventory, fewer promotions and well-chosen merchandise may be best able to weather potentially lower consumer spending.

THE OPINION: Consumers have been relying less on their credit cards less following the recession. Now the increased payroll tax and later receipt of tax returns may cut further into consumer's discretionary spending and test retailers, said analysts Eric Beder and Danielle McCoy.

A two-year temporary cut in payroll taxes, designed to help boost the economy, expired on Jan. 1, causing smaller paychecks for many Americans this year. And lawmakers' last-minute deal on Jan. 1 averting a "fiscal cliff" of income tax increases and steep spending cuts led to a delay in tax return filings. The Internal Revenue Service began accepting returns eight days later than normal after scrambling to address the impact of the deal on tax law. That could mean a longer wait for an income tax refund.

The analysts said that retailers who keep inventory levels low, have funds available to make quick merchandise orders so they can respond to the most popular trends and run fewer promotions can still increase profitability. They cited teen retailer American Eagle Outfitters Inc. and The Wet Seal Inc. as strong picks.

But Abercrombie & Fitch Inc. was among its laggards, with low expectations for both its namesake stores and Hollister chain. The analysts said the chains may have new spring looks, but discounts on its core products could drag down results.

THE BIG PICTURE: Americans shopped the winter clearance racks in January, resulting in strong sales during the month for retailers. But spending is expected to slow as the deals dry up, and as Americans begin to digest rising gas prices and the higher payroll tax.

THE SHARES: Shares of American Eagle slipped 21 cents to $20.13 by late afternoon. Wet Seal's shares fell 5 cents, nearly 2 percent, to $2.86. Shares of Abercrombie fell 62 cents to $50.