Look into shorting the high-end retailers mentioned here
Retails Latest Markdown? Profit Forecasts
Tuesday December 23, 10:57 am ET
By Emily Kaiser
CHICAGO (Reuters) - First it was discounted toys, then cheap consumer electronics. The next big markdown for U.S. retailers may be profit forecasts.
With only two shopping days left before Christmas, stores are counting on big after-Christmas crowds and piles of plastic gift cards to prop up lackluster sales. But that may be too late for earnings because shoppers will be looking for steep, profit-squeezing discounts, analysts said.
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Many analysts have already downgraded their profit forecasts, particularly for lower-end department stores and discounters where holiday sales have not met expectations. The companies themselves may give gloomy profit outlooks when they report December sales early next month.
Merrill Lynch said on Tuesday that analyst Dan Barry trimmed his earnings estimates for Kohl's Corp. (NYSE:KSS - News), J.C. Penney Co. Inc. (NYSE:JCP - News), Sears, Roebuck and Co. (NYSE:S - News) and Target Corp. (NYSE:TGT - News).
Barry was among the more bullish analysts at the start of the holiday shopping season, and his estimates on all four retailers had been above the average of Wall Street forecasts.
"The low-end consumer is spending much less than expected," Barry said in a research note.
According to Reuters Research, a unit of Reuters Group Plc, some two dozen analysts have trimmed fourth-quarter earnings forecasts for mid-priced department store Kohl's recently. J.C. Penney's estimates have been cut by 13 analysts.
Retailers have blamed disappointing holiday sales on back-to-back weekend snowstorms, gift cards that don't immediately count as revenue, bargain-hungry last-minute shoppers and the heightened security situation.
Sears spokesman Ted McDougal declined to comment on profit expectations, noting the retailer will release fourth-quarter results in late January.
Representatives for Kohl's and Target did not immediately return calls seeking comment. A J.C. Penney spokeswoman said the company had not announced any changes to the earnings forecast it gave in November, when it reported third-quarter results.
LUXURY CHAINS GAIN
Luxury chains have been among the few bright spots, with analysts expecting a strong sales and profit performance from the likes of Nordstrom Inc. (NYSE:JWN - News), Saks Inc. (NYSE:SKS - News) and Neiman Marcus Group Inc. (NYSE:NMGa - News).
Reuters Research shows that 17 analysts have raised their fourth-quarter profit estimates for Nordstrom recently, and 11 have nudged up their forecasts for Saks.
Calls to Nordstrom and Saks were not immediately returned. A Neiman Marcus spokeswoman declined to comment.
Analysts have said a recovering economy was helping wealthier households more than it was aiding lower-income families. Stock market gains also tend to spur high-end spending.
With time running out for a last-minute sales surge, the remaining wild card was plastic gift certificates. Trade groups reported demand has doubled for gift cards, which can skew retailers' sales because they don't count toward revenues until they are redeemed for merchandise.
Deutsche Bank analyst Bill Dreher said the gift cards could shave as much as 2 percentage points off of December sales at stores open at least a year -- a key retail measure known as same-store sales.
"We believe this bonus sets up retailers to dramatically outperform through the remainder of the year and even into the first quarter," Dreher said, adding that a recent sell-off in retail stocks created a good buying opportunity.
Dreher estimated that 15 percent of gift cards would be redeemed in the first weekend after Christmas, which would count toward retailers' December sales.
He predicted that 80 percent of gift cards would be redeemed in the two weeks after Christmas, which would benefit fourth-quarter results. Most retailers operate on a fiscal year ending Jan. 31.
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