Retail stocks could be headed for a rough session Tuesday as Merrill Lynch delivered an across-the-board downgrade of the group and pared expectations for the remainder of 2002.

Merrill issued cautious comments on the retail sector as a whole and downgraded a number of specialty names, citing concerns that consumers are spending more conservatively than anticipated. "We believe that a consumer slowdown is developing and that discretionary spending, which impacts apparel, will be tightly managed by shoppers," analysts wrote in a research note.

The firm lowered its investment rating on AnnTaylor ( ANN), Limited ( LTD), Oakley ( OO), Sports Authority ( TSA), Too ( TOO), Williams-Sonoma ( WSM), Talbots ( TLB), and Coach ( COH).

Other factors contributing to the firm's negative outlook include the one-year anniversary of the Sept. 11 terrorist attacks, forecasted poor fall weather, and six fewer Christmas shopping days. "While 9/11 presents easy comparisons it is our opinion that expectations may be too aggressive for a week which could very well find consumers at home watching television or at the least, not in the mood to shop."

In light of these issues, Merrill also cut its forecast on broadline retailers, recommending a shift to a defensive stance. The firm downgraded Barnes & Noble ( BKS), Borders ( BGP), BJ's Wholesale ( BJ), Costco ( COST), and Target ( TGT) to a neutral rating.

The brokerage also reduced ShopKo ( SKO), Nordstrom ( JWN), and Dollar Tree ( DLTR) to a sell.

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