We’re nearing the final days of September, and believe it or not, the market is already focused on the holiday shopping season, which is crucial for American retailers. Take Wal-Mart (WMT), the big box behemoth that spooked the market after Bloomberg reported that it is cutting orders for the next two quarters. This news was enough to send shares of WMT down 1.5% Wednesday and weigh on competitors Costco (COST), Dollar General (DG) and Target (TGT).

The report, while dubbed “completely false” by Wal-Mart, brought to light the fact that it has more inventory than the company would like. According to the company, Wal-Mart had to take in back-to-school merchandise early so it is cutting back order where “it makes sense.” Even so, I’m not taking any chances about this stock so I have WMT down as a D-rated sell.

Other retailers have it even worse: J.C. Penney (JCP) plunged nearly 15% today on analyst speculation that the department store could go bankrupt. Notably, Goldman Sachs (GS) downgraded the company due to the fact that it’s expect to burn through more than $1.1 billion in cash during the first three quarters of 2014. JCP is an F-rated Sell and has been for quite some time.

Yesterday I highlighted five companies that could blow estimates out of the water this earnings season—one of which was fellow big box retailer Best Buy (BBY). Today we’re going to flip the coin and see which companies—handpicked from the retail sector—are expected to disappoint for the third quarter. Just as upward revisions in analyst earnings estimates indicate whether a company could exceed expectations, downward revisions are a big red flag for earnings season. So let’s start off with three of the companies we just discussed:

• Wal-Mart: The average earnings estimate has fallen $0.04 to $1.13 in the past two months. Wal-Mart Stores is expected to post 4.6% annual earnings growth for the third quarter.
• Target: In the past two months, analysts have cut their earnings estimates down 28% to $0.64 per share. This means that Target is headed towards a 21% year-over-year drop in earnings. TGT is a D-rated sell.
• J.C. Penney: Unsurprisingly, the analyst community now expects JCP to see a loss of $1.68 per share in the third quarter—as recently as two months ago, analysts had forecast a loss of $0.64 per share.
• Kohl’s (KSS): In the past two months, the consensus estimate has fallen 9% to $0.86 per share. Analysts now expect Kohl’s to post a 5.5% year-on-year drop in profits. KSS is a C-rated hold.
• Sears (SHLD): This is another earnings dud. In the past sixty days, the analyst community has slashed its consensus estimate by $0.45. The consensus now calls for a loss of $2.97 per share—representing a 49% plunge compared with Q3 2012. SHLD is a D-rated sell.

What we’ve learned today is that there is plenty of risk in investing in retail. While some specialty retailers, like Best Buy and Home Depot (HD) still score well in Portfolio Grader, I advise that you run all of your retail stocks through my screening tool to see if they too make the cut.

Sincerely,

Louis Navellier