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With second-quarter earnings season nearly over, results for the back half of the year are now under Wall Street's microscope, and parts of the retail sector aren't standing up to scrutiny.

While the mood is

upbeat for the specialty apparel retailers, whose earnings are expected to be boosted by a strong fashion cycle, Wall Street analysts suspect that two other subgroups -- consumer electronics and home furnishings -- will feel the bite of waning demand. Some even think the strong apparel season is likely to gobble up discretionary income that otherwise would be spent on home electronics or furnishings.

Higher gas prices are already stretching budgets, analysts argue. And while last year's tax stimulus helped boost sales, it is consequently expected to make this year's sales comparisons difficult. The expectation that these factors could hurt earnings had analysts recently lowering price targets on several names in the group.

Indeed, consumer spending, as reported by at least two sales-tracking reports, declined in June from highs touched earlier in the year. U.S. retail sales dropped 1.1% in June vs. a 1.4% rise in May, according to the government. Same-store sales, or sales at retail chain stores open at least a year, were up just 2.9% in June, the weakest increase in a year, according to the International Council of Shopping Centers, or ICSC. That compared with a 5.7% increase in May.

In part because of those soft results, Sanford Bernstein analyst Colin McGranahan has a guarded outlook on the consumer electronics space, leading him to reduce his price target to $55 from $60 on one of the sector's biggest players,

Best Buy

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. He cited a conservative earnings view and uncertainty in the environment.

"The central near-term issue for consumer electronics retail will be whether the product cycle trumps the macro trends in the second half of 2004," said McGranahan. "With tough anniversaries coming up and recent signals of consumers with fewer dollars being more selective, we remain cautious on overall near-term discretionary spending and more so for consumer electronics spending, despite the strong underlying product cycle."

He noted that discretionary spending is three times as volatile as overall consumer spending.

But looking ahead, economist Jon Lonski of Moody's is calling for a 0.5% to 0.7% increase in July retail sales, and the ICSC expects July same-store sales to increase 3% to 4%. Retail sales for July will be released Aug. 12, while the majority of same-store sales for July will be released Aug. 5

July's retail sales certainly won't reach the height of May's increase, but Lonski thinks by no means do the expected results imply that consumer spending is falling off a cliff. He cited


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weekly sales summary released on Monday, where the company reiterated for the third week in a row that July same-store sales are on track for a 2% to 4% increase.

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"Retail sales are healthier than what might be inferred by June's drop, never mind the year-over-year growth," said Lonski. Retail sales are up 6.3% from last year.

It's important to have perspective. The first half's breakneck growth had to wane, Lonski said. "You're making a big mistake if you thought that spending would be sustainable."

McGranahan noted that while he is more optimistic on Best Buy's medium- to long-term performance than he is on near-term results, the shares have historically traded on near-term trends. "It remains a stock with a wild upside and stunning downside," he said.

Best Buy shares closed down $1.06, or 2.3%, at $46.05 in Monday trading. They're up about 9% year over year.

Over in the home furnishing sector, Wedbush Morgan analyst Joan Storms reduced her price targets on


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Bed Bath & Beyond

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"Concerns about consumer spending trends in the home space due to rising interest rates, slowing refi activity and accelerated spending in the apparel space have caused a revaluation of the group," said Storms in a July 22 research note. She lowered Williams-Sonoma's price target to $41 from $43 and dropped Bed Bath & Beyond's target to $46 from $52.

Shares of Williams-Sonoma ended Monday trading down 22 cents at $30.61, while Bed Bath & Beyond shares ended up 26 cents at $35.15. Williams-Sonoma shares are up about 9% from last year, and Bed Bath & Beyond shares are down about 11%.

For his part, Lonski thinks the consumer is far from done buying flat-screen TVs and furnishing their new homes. "Home furnishings

sales have seemed to come in well under what otherwise might be inferred from the record-breaking sales of homes, as well as the hard-to-measure but likely boom in home improvement," he said, citing Monday's report that

existing home sales in June were higher than expected.

Lonski called Wall Street analysts' less-than-optimistic second-half expectations a result of the "bad rep" they, as well as corporate executives, got earlier in the year when they overestimated sales. "It makes sense that they're approaching this current slowdown with great prudence and more caution," he said.

"Some time may pass before investors feel confident that the unfolding deceleration of retail sales and economic growth will not continue indefinitely," Lonski concluded. "The deceleration will perhaps bottom later this year."