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January Gives Retail High Hopes

As earnings reports start coming in this week, the outlook for holiday results has brightened.
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Retail earnings reports will start trickling in this week, and investors' hopes have brightened for the sector despite a holiday season that demanded aggressive discounts to achieve mediocre sales.

Wall Street's teen fashion favorite,

Abercrombie & Fitch

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, will get things started with its earnings release after the closing bell Tuesday.

Target

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and

J.C. Penney

(JCP) - Get J. C. Penney Company, Inc. Report

are on tap for Thursday, and next week promises to bring a frenzy of activity, with the likes of

Wal-Mart

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,

Home Depot

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and

Gap

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set to reveal their holiday results.

According to Thomson First Call, fourth-quarter earnings for retailers in the

S&P 500

are expected to be up 16% over the same quarter in 2004. That marks stronger expectations from the 14% growth estimate given in early January. The improved outlook came after a

glowing sales month in January, which was boosted by warm weather in the Northeast and a flood of post-holiday gift card redemptions.

Market research firm Retail Metrics reported that retailers' January same-store sales rose 4.8% from a year earlier, ahead of expectations for 4.1% growth. Meanwhile, the government said Tuesday that its measure of retail sales, excluding autos, rose 2.2% in January. That figure beat estimates and marked the best monthly performance since late 1999.

On Wall Street, January served as a much-needed chaser to a holiday season that, despite meeting expectations, left many investors who bet on a blowout with a bitter taste in their mouths. The International Council of Shopping Centers said its holiday same-store sales index rose 3.5% for November and December, and the government said December retail sales were up just 0.2%, excluding autos.

In addition to the overall pickup in January, a breakdown of fourth-quarter estimates shows that analysts recently raised projections for Gap's earnings results by a whopping 26%, which lifted the whole sector. The specialty clothier, scheduled to release earnings Feb. 23, is expected to report earnings of 39 cents a share for the quarter, based on First Call's average analyst estimate. That marks a decline from the 40 cents a share the company recorded for the same quarter a year earlier, but it's a steep increase from last month's estimate of 31 cents a share.

Investors are unaccustomed to seeing Gap lend strength to the retail sector these days. Its shares shed 16% in 2005 amid a series of dismal sales and earnings results that led some analysts to wonder whether its iconic brand was tarnished in the eyes of consumers. But the company surprised Wall Street with 1% same-store sales growth in January. While Gap warned investors that profit margins were "significantly below last year," analysts concluded that margins weren't as bad as expected and raised their estimates.

"They initially thought gross margins were going to be really, really bad," says Cathay Financial analyst Howard Tubin. "Now, they think they'll be less bad."

Tubin, who doesn't own shares of Gap (his firm has no investment banking relationship with the company), holds an outperform rating on the stock. He said the shares have an attractive valuation, and the company's operations are in good shape.

"Once they get the product right, there could be a lot of upside at Gap," Tubin says. "The brand is still valuable."

Elsewhere in apparel, consensus estimates for

Limited

(LTD)

have inched up in the last month to $1.01 from $1 a share. It's also expected to report results Feb. 23. Next Wednesday, Wall Street will hear from

TJX Cos.

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, which operates TJ Maxx and Marshalls chains. Wall Street estimates for the quarter are up a penny in the last month to 44 cents a share.

Among the big-box discounting titans, Target prevailed in the same-store sales battle against its larger nemesis, Wal-Mart. It posted a 5.2% comp-sales figure for January, compared with Wal-Mart's 4.7%. In December, Target had a 4.7% gain against Wal-Mart's disappointing 2.2% pace.

Analysts, on average, are expecting the trendy chain to report earnings of $1.05 a share Thursday. Target posted earnings of 89 cents a share for the year-earlier period.

Despite Wal-Mart's disappointing December, which prompted it to guide earnings to the low end of its previous forecast of 82 cents to 86 cents a share, stronger results in January led analysts to conclude that its record-setting gift card sales over the holidays had boosted results. Wall Street expects the world's largest retailer to report earnings of 83 cents a share next Tuesday, up from last year's 75 cents a share.

Home Depot will join Wal-Mart in the spotlight next Tuesday, with analysts expecting the home improvement giant to report earnings of 56 cents a share, up from last year's earnings of 47 cents a share. Its chief rival,

Lowe's

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, will report the following Monday, with analyst estimates calling for earnings of 79 cents a share, up from the 54 cents a share the company earned a year earlier.

Both chains are expected to benefit from rebuilding efforts along the Gulf Coast after the fall's hurricanes. Each company has demonstrated a consistent ability to perform as consumers continue to invest in their homes, but some analysts have expressed concerns about what effect a slowdown in the housing market will have on the home improvement sector.

Among department stores,

Federated

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will report next Tuesday, with earnings expected to total $2.61 a share, up from last year's $2.54 a share. The conglomerate continues to contend with issues related to merging its various businesses with those of its former rival,

May Department Stores

, which it acquired last year.

After J.C. Penney's report Thursday, fellow department stores

Kohl's

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and

Nordstrom

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are on tap for next week.

Abercrombie & Fitch is expected to report earnings Tuesday of $1.78 a share, up from last year's $1.15 a share. The chain appears to have achieved the right fashion formula for finicky youngsters. Its shares are up 5% so far this year after rocketing more than 40% in 2005.

Results from

Pacific Sunwear

(PSUN)

are due at the end of the month, while

American Eagle Outfitters

(AEOS)

will report on March 1.

Consumer electronics chains like

Best Buy

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and

Circuit City

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won't report until late March and early April, respectively. Both chains posted big holiday sales numbers amid strong demand for flat-screen televisions.