Electronics, Furnishings Chains Face a Lean Fall

With second-quarter earnings season nearly over, results for the back half of the year are now under Wall Street's microscope, and parts of the retail sector aren't standing up to scrutiny.

While the mood is upbeat for the specialty apparel retailers, whose earnings are expected to be boosted by a strong fashion cycle, Wall Street analysts suspect that two other subgroups -- consumer electronics and home furnishings -- will feel the bite of waning demand. Some even think the strong apparel season is likely to gobble up discretionary income that otherwise would be spent on home electronics or furnishings.

Higher gas prices are already stretching budgets, analysts argue. And while last year's tax stimulus helped boost sales, it is consequently expected to make this year's sales comparisons difficult. The expectation that these factors could hurt earnings had analysts recently lowering price targets on several names in the group.

Indeed, consumer spending, as reported by at least two sales-tracking reports, declined in June from highs touched earlier in the year. U.S. retail sales dropped 1.1% in June vs. a 1.4% rise in May, according to the government. Same-store sales, or sales at retail chain stores open at least a year, were up just 2.9% in June, the weakest increase in a year, according to the International Council of Shopping Centers, or ICSC. That compared with a 5.7% increase in May.

In part because of those soft results, Sanford Bernstein analyst Colin McGranahan has a guarded outlook on the consumer electronics space, leading him to reduce his price target to $55 from $60 on one of the sector's biggest players, Best Buy(BBY Quote - Cramer on BBY - Stock Picks). He cited a conservative earnings view and uncertainty in the environment.

"The central near-term issue for consumer electronics retail will be whether the product cycle trumps the macro trends in the second half of 2004," said McGranahan. "With tough anniversaries coming up and recent signals of consumers with fewer dollars being more selective, we remain cautious on overall near-term discretionary spending and more so for consumer electronics spending, despite the strong underlying product cycle."

He noted that discretionary spending is three times as volatile as overall consumer spending.

But looking ahead, economist Jon Lonski of Moody's is calling for a 0.5% to 0.7% increase in July retail sales, and the ICSC expects July same-store sales to increase 3% to 4%. Retail sales for July will be released Aug. 12, while the majority of same-store sales for July will be released Aug. 5