Thursday, May 27, 2010

Retailers' Outlook in the Second Half

Earnings report cards of retailers so far this year have been upbeat. In the last quarter, about two-thirds of the nation's retailers' earnings topped analysts' expectations, with profits up 26% on average from a year earlier, according to Thomson Reuters.

Their stocks reflected that. Retail stocks have been one of the best performers since the bottom of the financial-meltdown-induced bear market. Many retail stocks had a streak of new 52 week highs until recently, for instance, Steve Madden (SHOO), Aeropostale (ARO), Kohl's (KSS), Autozone (AZO), Macy's (M), Officemax (OMX) to name a few. [Click on the diagram below to enlarge it]

Can this be sustainable? Wall Street analysts seem to think not. They forecast retail-profit growth will slow to 17% in the second and third quarters this year and to 11% in the fourth quarter, according to Thomson Reuters.

Companies are very cautious too. Macy's, Kohl's, Staples that have just reported spectacular earnings offer cautious outlook of the full year.

Some of the concerns cited by analysts and companies include:
1. Tougher comparison --- 2008 and early 2009 were easy beat. Consumer confidence and sales were at historically depressed level. Excess inventory cost a bunch. Companies rushed to slash inventory by giving up profit margins altogether.

2. Expected increase in inventory rebuild and other expenses---As the economy and demand recover, companies have started to rebuild inventory and spending on marketing, technology and capital expenditure. Profits can no longer come from cost cutting as they did in the last few quarters

3. Price hikes in raw materials--- As global economy recovers, so is the price of raw materials. Some retailers like Abercrombie and Fitch (ANF) is already citing rising cotton price eating into the profit margin.

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