Retail Looks Shopworn

With first-quarter earnings from most retailers on the books, investors have turned skittish. Earnings growth has slowed, consumer spending is shaky, and a variety of chains expressed reservations about the future.

As usual, prognosticators are working with a variety of conflicting data in evaluating the sector's prospects. But the S&P Retail Index has dropped steadily so far this year, down 9%, representing a continuous lowering of expectations on Wall Street. Meanwhile, Thomson First Call estimated that earnings growth for retailers has slowed to around 8% in the first quarter, down from 20% for the fourth quarter of 2004 and down 62% in the year-ago period.

Most analysts agree that consumers hit a soft patch during the quarter that was mostly attributable to high gas prices and bad weather. The situation bears a striking resemblance to the slowdown that hampered the stock market last summer. Back then, some observers proclaimed that consumers finally had reached the end of their spending rope, only to be proven wrong when a healthy holiday followed the president's re-election.

A year later, the situation could be more dire.

"We expected some weakness here, but the depth of some of the reductions in forward guidance for the June and September quarters are a little surprising," said Andy Graves, a retail analyst with Pacific Growth Equities.

The quarter's biggest disappointment came from the world's largest retailer, Wal-Mart (WMT Quote). The mass-merchandising behemoth reported weaker-than-expected profit on weak spring sales and warned that results for the current quarter would miss Wall Street forecasts.

Wal-Mart's chief rival, Target (TGT Quote), fared better, beating earnings estimates by a penny a share and affirming second-quarter guidance. The contrast among discounters suggested that Wal-Mart's problems were specific to Wal-Mart, but a close look at their monthly sales results reveals they both suffered slowdowns in April.