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Retail Stocks: Don’t Take That Victory Lap Yet

The news has been great, but the forecasts look cloudy


Things sure are looking good for retail so far this year, right?

The answer is an all-too-frustrating “yes and no” — it just depends on which way you look.

Those with their necks craned backward wouldn’t be blamed for smiling, as the past couple of months have dropped plenty of positive data into retailers’ laps, including today’s announcement of a boffo February for retail sales. But those looking down the road have plenty of reason to be wary about their next few steps.

To get a better idea of where retail stocks are sitting, let’s take a gander at both:

Looking Back

Strong February retail sales cued applause and talk of how the consumer and economy seem better off than we thought. We saw an overall increase of 1.1% for the month — the largest gain since September — along with a slight upward revision for January.

We’ve also received other promising signs, including a string of better-than-expected earnings reports from big sector names and solid February same-store sales from numerous individual companies.

Here’s a quick look at some of those single-stock headlines:

  • Shares of TJX Companies (NYSE:TJX) climbed when the company reported a 27% year-over-year improvement in earnings and a 15% gain in sales, on top of announcing plans to repurchase stock and raise its dividend.
  • Luxury retailer Michael Kors (NYSE:KORS), which already was soaring prior to its earnings report, gained nearly 9% in a day after posting eye-popping 47% earnings growth for the most recent quarter. That extended KORS’ year-to-date gains to a whopping 24% at the time.
  • After a much slower start to the year, Ann Inc. (NYSE:ANN) posted a solid report that gave shares a much-needed boost. Ann beat expectations on the earnings end thanks to 9% YOY growth, giving shares a 7% bump.
  • Limited Brands (NYSE:LTD) beat the Street with an 8% rise in February same-store sales.
  • Buckle‘s (NYSE:BKE) same-store sales for the same time period grew just under 15% — nearly three times what analysts had slated.

Heck, even so-called bad news for the sector wasn’t all that bad. Big-box retailers Target (NYSE:TGT) and Walmart (NYSE:WMT) each admitted to struggles over the winter months — as seen in Walmart’s leaked emails — but still managed to post better-than-expected numbers for the most recent quarter. Neither can complain on the share side, either; WMT is up 8%, just shy of the S&P 500, while TGT is up 13% so far.

Also, Ross Stores (NASDAQ:ROST), which has been on a downward trend since an unexpected drop in last month’s same-store sales, is still in the black year-to-date … and Zumiez (NASDAQ:ZUMZ) posted a 9% decline for February comparables but still has climbed 20% since Jan. 1.

No wonder the Retail SPDR (NYSE:XRT) is beating the market with nearly 12% gains so far this year.

Looking Forward

All that said, the excitement around the retail landscape needs to be peppered with a dose of reality. I hate to be a Debbie Downer, but a few factors simply can’t be overlooked:

  • These stocks also have been riding a broader bull market that has seen the Dow Jones hit all-time highs and put the S&P 500 within reach.
  • Half of the headline retail gain of 1.1% was thanks to higher gas prices. Gas sales posted their biggest advance since August and, excluding those purchases, the jump in retail sales was only 0.6% — still solid, but nothing crazy.
  • Many companies had a low bar to jump over, as analysts, consumers and the companies themselves were already worried about said gas prices, the end of the payroll tax cut, higher taxes overall and the impact of weather.

Topping it off might be the biggest reason for concern — the high number of retailers that have provided not-so-hot outlooks:

A perfect example is Express (NYSE:EXPR), which reported earnings this morning. The retailer beat analyst expectations for earnings and revenue in the most recent quarter, yet the stock was off between 8% and 10% most of the morning thanks to woefully disappointing projections. EXPR forecast current-quarter EPS in a range of 34 to 38 cents and full-year earnings of $1.40 to $1.54 per share — both well short of Street expectations for a respective 46 cents and $1.72.

Similarly, a lower-than-expected outlook sent shares of long-time laggard Abercrombie & Fitch (NYSE:ANF) sliding dramatically at the end of Feburary (though they have since regained a good chunk of that loss).

Things also are slowing for TJX, which forecast earnings of 59 to 62 cents per share for the current quarter and $2.66 to $2.78 for the year — below estimates of 63 cents and $2.84, respectively. Plus, TJX’s returns have slowed, and the stock is lagging the broader market.

And lastly, I’ll point to Walmart, which offered subpar Q1 guidance of $1.11 and $1.16 per share vs. expectations of $1.19.

I think you get the point.

Bottom Line

Sure, the not-so-hot guidance being doled out for the current quarter could offer retailers yet another low bar to hurdle later, as was the case in the previous quarter. However, the reality is hard to ignore: There has been a lot to like — and a good bit of outperformance — in retail so far, but what we can expect in the future isn’t anything to jump for joy over.

That’s not to say you should run screaming from the sector. But you might want to get selective about what you’re holding.

As of this writing, Alyssa Oursler did not own a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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