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For Retail, Book Still Open on 2004

Retail stocks are marching into the homestretch of a banner year, but failure to navigate a particularly thorny holiday selling season could set the stage for upheaval in 2005.

The S&P Retail Index has gained 25% since early August and is up a healthy 19% this year. The sector has blown away the broader market, with the S&P 500 recently up just 7% since Jan. 1.

Wall Street expects a repeat in 2005. Thomson First Call estimates that the Dow Jones Retail Index will post a year-over-year gain of 16.7% in earnings in 2005 vs. 15.5% in 2004. The S&P 500 is set for earnings to slow to 10.6% growth in 2005 from 19.1% in 2004.

While this year is shaping up to be a success, holiday sales, yet to be reported, could still make or break the annual profit performance of many retailers. So far, the yuletide shopping bonanza has been marred by some Grinch-like numbers, and economists say a weaker-than-expected holiday could foreshadow deeper problems for the very consumers whose pocketbooks keep retailers afloat.

"You can make a much stronger case that retail results are more likely to surprise on the downside than they'll surprise on the upside," said Ken Goldstein, economist with the Conference Board, an independent economic watchdog group.

A recent report from the government showing that November retail sales rose 0.1% was better than economists expected, but it did little to improve sentiment dampened by a string of sales disappointments from individual companies. Retail stocks drooped on the news, as traders concluded that a 0.1% gain was a lousy excuse to celebrate going into the holidays.

"The gain in sales in November wasn't bad, but it certainly wasn't anything to brag about, and even that was accomplished with a fair amount of discounting and promotions," Goldstein said. "Now the expectations are for 4%. Last year, 4% represented a lousy year. This year it's the same, but the adjectives being used are a little bit different, and I think that's kind of curious."

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