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Humbug Holiday for Retail?

By David Urani

Alright, earnings season makes its official kickoff tonight and if you ask me the market might be getting cold feet ahead of it. That's understandable because in the lead-up to the quarterly influx of earnings reports we're getting a few yellow flags out of consumer companies:

 Sears (SHLD) is feeling the heat, having updated its 4Q (fiscal quarter ending February 3rd) expectations. They see comparable sales down 1.8% year over year for the first nine weeks of the quarter, driven by weak consumer electronics. Yet, even excluding electronics the company still sees a sales decline of 0.2%. Concurrently, CEO D'Ambrosio is unexpectedly stepping down due to family issues.

 And there's more out of the big box retail industry, with a new strategy announced by Target (TGT).Target had already shown their December sales to be flat year over year which of course isn't ideal. And to make up for some sales softness, they now say they'll match prices from online retailers (Amazon (AMZN) comes to mind) year round. Certainly there's a growing contingent of shoppers that peruse the aisles at brick and mortar shops before turning around and buying the same product cheaper online. So, as we have been suspecting sales volume for the latest holiday season may have come at the expense of margins as retailers compete on prices.

 We also got a sales warning out of Gamestop (GME). To be fair, I don't think there have been big expectations for the games market as sales have struggled over the past year; however, a dose of big titles to round out the year may have raised hopes. Gamestop now projects holiday sales of $2.88 billion, down 4.6% over 2011, along with EPS guidance at the lower end of their previous estimates and the stock is taking a hit.

These aren't necessarily tell-tale signs that 4Q earnings season is going to be a rough one, but going into it these few yellow flags won't help what's already a jittery mood. As we know, concern of the Fiscal Cliff weighed on consumer sentiment last month and fortunately we escaped the broad tax increases on everybody (minus the "rich"). Even so, we did get the less-reported payroll tax cut expiration worth 2% of one's income (that's roughly $1,000 for an average taxpayer) and consumers may continue to second-guess discretionary purchases going through the beginning parts of this year.

David Urani
Wall Street Strategies

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