Retail Looks Shopworn

Also, Federated (FD Quote) beat earnings estimates by 4 cents, boosted by strong demand for spring fashions. However, May Department Stores (MAY Quote), which Federated recently agreed to acquire, said its earnings fell 37% from a year ago, hurt by weak sales of its proprietary ladies' and men's apparel brands and incremental markdowns.

Even with good news coming from a handful of major retailers, Graves pointed to slowdowns coming from apparel companies such as Gap (GPS Quote), Saks (SKS Quote), Limited (LTD Quote), Fossil (FOSL Quote), Jones Apparel (JNY Quote), New York (NWY Quote) and Liz Claiborne (LIZ Quote) as cause for concern.

"People talk about rising rates and rising oil prices, but I think there's something bigger than that going on," Graves said, pointing to rising state and local tax rates, parking costs and food prices. "The effects of the rising cost of living relative to the growth in wages, which has been stagnant, is starting to pinch a broader demographic."

He said the effects are less pronounced among teen apparel retailers. Those chains have long been the retail sector's stars, but signs of weakness are beginning to show up there as well. Monthly comps, which have been consistently in the double digits at chains such as American Eagle (AEOS Quote) and Abercrombie & Fitch (ANF Quote), have mostly dropped into the mid-single digits. The decline is partly due to tough comparisons to last year, but some former standouts have been struggling, such as Pacific Sunwear (PSUN Quote) and Aeropostale (ARO Quote).

Investors even bailed on American Eagle last Thursday after it said its first-quarter profit more than doubled on spring sales of its teen clothing, and said second-quarter earnings would beat analysts' average forecast. The stock traded down 6% on the session, after management expressed concerns about upcoming comparisons and analysts predicted a slowdown was in store.

"It's becoming a more competitive environment and you can succeed if you execute and differentiate yourself, but it's not the layup that it was a year ago," Graves said. "Last year, we came out and said 'buy everything.' This year you have to be far more selective."