Five Things to Know This Earnings Season

5. Margins matter now more than ever. This earnings season, profit margins are something that we will have to keep a very close eye on. I see two major trends taking place in terms of gross margins:

In retail, we have had one of the slowest holiday selling seasons in many years. Retailers have had to take dramatic markdowns in an effort to generate sales in what was also a shorter holiday selling period than in the past year. As a result, we should expect retail margins to decline year over year.

Still, there could be one positive consequence of all the retail markdowns: reduced inventories.

Commodity prices have fallen dramatically after soaring for the last few years and hitting all-time highs last summer. As these prices have fallen, companies that rely on energy, raw materials or food stuffs for product inputs will benefit and their margins should expand.

However, be on the lookout for companies that got caught over hedging their commodity costs and are stuck with higher cost contracts. General Mills (GIS) which reported in December is a great example of a company with margins that suffered due to poor hedging decisions.

Your Homework

The last quarter of 2008 is likely to be a disappointing period for corporate earnings. In addition, the outlook for the first quarter of 2009 and entire year is not going to be rosy. Over the month or so, try to anticipate which companies will cut back on dividends, have positive or negative margin growth and announce new write-offs or layoffs.

Also, be astute and analyze which companies will survive the current recession in strong shape and which ones are not likely to make it. For example, Circuit City has already filed for reorganization under the bankruptcy code leaving Best Buy (BBY) as the surviving consumer electronics retailer -- even though in the short term, Best Buy's latest results are not likely to impress many investors.

Related: Good, Bad & Ugly This Earnings Season and Forget Earnings

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