Weak Retail Numbers Portend More Earnings Weakness

As March sales figures trickle in Thursday from some of the lesser retail names, a grim picture for the nation's merchants is emerging.

A week before the country's top retailers release March same-store sales figures, which gauge activity in shops open at least a year and are a key barometer both of the health of the consumer sector and the attractiveness of retail stocks, companies such as Guess? (GES Quote), Footstar (FTS Quote), Dress Barn (DBRN Quote) and Neiman Marcus all reported dismal sales for March.

In a statement typical of what many retail executives have been saying amid the faltering economy, Neiman Marcus co-chief executive Brian Knez said: "March comparable revenues reflected what has become a very challenging retail environment. Volatile financial markets during March exacerbated an already difficult comparison against double-digit revenue gains a year ago."

And while it is still a week before the top retailers report monthly sales, the weekly sales reports that some release indicate they too had a tough March, with many unlikely to meet modest expectations. Target (TGT Quote), for example, which includes its flagship Target stores as well as Mervyn's and Marshall Field's, has seen its monthly same-store sales track below plans for a low-single-digit increase. Sales at Wal-Mart (WMT Quote), the nation's largest retailer, are tracking below plans for a 3% to 5% increase, while Kmart (KM Quote), Federated (FD Quote), May (MAY Quote) and Sears (S Quote) also have been below plan.

Coming Down

The upshot for investors is that some of these companies could lower quarterly earnings expectations, analysts are beginning to acknowledge. "We anticipate first-quarter estimates for many of the broadline retailers could have to be reduced by a few pennies," wrote Prudential Securities analyst Wayne Hood in a recent research note. "We see more downside risk in the department store sector."

In another report, Hood dropped his earnings-per-share estimate for Sears to 58 cents from 63 cents in the first quarter, although he kept his strong buy rating and $60 price target for the stock. (Prudential hasn't done recent underwriting for Sears.) Sears lately traded at $34.41, up 80 cents.

Concerns over quarterly earnings sparked by the slow economy are not relegated to the bricks-and-mortar world of retailing. Online sales in January and February have been weak, according to a recent study by the National Retail Federation. In particular, sales of books, music and videos have been especially slow, raising the question of whether Internet retailers Amazon.com (AMZN Quote) and Barnes & Noble.com (BNBN Quote) can meet earnings targets, says analyst Mark Rowen, also of Prudential Securities.

Buying CDs

Despite, this most analysts still view the retail sector has an oasis of relative sanity amid the turmoil in the broader market.

The S&P Retail Index is virtually flat on the year, which puts it as the fourth best-performing setor out of 22 industry groups, according to Merrill Lynch analyst Dan Barry. In other words, investors tracking the index have not made a dime since the beginning of the year. Still, since last fall the index is up substantially, some 17% since mid-October.

After a brief pullback in April, Barry expects retail stocks to resume their winning ways, a view echoed by many who follow the sector. Two top reasons for the bullishness are easier sales comparisons in the second half and the fact that, historically, retail stocks are some of the top performers in the wake of falling interest rates.

In recent trading, the S&P Retail Index was up 1% at 842.