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U.S. retail sales: will upswing boost earnings?

NEW YORK (Reuters) - Investors who watched U.S. retailers have their best holiday sales season in three years hope for one more gift when top retailers report December sales this week: upgraded forecasts for earnings.

A pedestrian crosses a snow covered crosswalk with her shopping bag along Fifth Avenue in New York December 29, 2010. REUTERS/Lucas Jackson/Files

Wall Street analysts expect top U.S. chains to report that sales at stores open at least a year, or same-store sales, rose 3.3 percent in December, according to Thomson Reuters data.

That follows a 6 percent increase reported for November.

But that strong end to the holiday season has been largely priced into stocks, said Manning & Napier analyst Walter Stackow. Investors are looking for companies to increase their earnings forecasts as a sign that the sales were not “bought” with unexpected margin-sapping discounts.

Those companies’ shares are likely to rise, Stackow said.

Shoppers turned out in greater numbers this year, buoyed in part by pent-up demand after two seasons of frugality and a general sense that the economy is finally improving.

Still, Wall Street is fretting that shoppers will put their wallets away for a while, now that Christmas is over, putting a question mark over the U.S. economic recovery given that consumer spending makes up 70 percent of the U.S. economy.

“People have tended to shop during the times they need to, like holidays or back to school,” said Nomura analyst Paul Lejuez. “During off periods, they haven’t been coming out.”

“A good December might not mean a great January, February, March,” he added.


Retailers appeared to keep their momentum in the final week of the month. The International Council of Shopping Centers and Goldman Sachs said chain-store sales for the week ended Jan. 1 were up 3.6 percent from the same week a year ago.

Last week’s massive blizzard that dumped as much as three feet (90 cm) of snow on parts of the the U.S. Northeast likely put a small dent in December sales. Research firm ShopperTrak has estimated that $1 billion in retail sales may have been postponed due to the storm.

Council of shopping centers chief economist Michael Niemira told Reuters the snowstorm could lower the December sales growth rate by 0.5 of a percentage point, though some purchases may show up in January.

Chains such as Target Corp, TJX Cos Inc, J.C. Penney Co Inc and Abercrombie & Fitch Co will report sales numbers on Wednesday and Thursday.

So far most analysts say the season’s discounting was not out of line, boding well for retailers’ results.

“I did not see any kind of chaotic rush to runaway promotions,” said Richard Hastings, a consumer strategist at Global Hunter Strategies.

J.P. Morgan analyst Charles Grom predicted that a strong November and the expectation of solid December sales would prompt discounter Target, department store chains Penney, Macy’s, Kohl’s Corp, and upscale retailers Nordstrom Inc and Saks Inc to raise profit forecasts.

The spending recovery helped the S&P Retail Index rise 23.4 percent in 2010, compared to the broader S&P 500’s increase of 11.7 percent. However, the index has stalled since early December on fears the rally has run out of steam.


December’s biggest winners are expected to include department stores such as Macy’s, J.C. Penney and Kohl’s as enough shoppers are on a sounder financial footing for them to trade back up to those chains from off-price retailers.

At the same time, with unemployment still near 10 percent, discounters continue to draw shoppers and should report some of the biggest gains, aided all the more by their forays into fresh food and, in Target’s case, a push into consumer electronics that has damaged Best Buy.

Deutsche Bank analyst Bill Dreher named Kohl’s, upscale department store Nordstrom Inc and Target among his top stock picks.

Still, whether Target can keep its streak in electronics is tough to determine given its aggressive pricing and deeper inventory, said Janney Capital Markets analyst David Strasser.

Target and other retailers that cater to a lower-income group, including off-price retailer Ross Stores, may struggle later this year if gasoline prices keep rising, said Hastings.

Ross and TJX Cos, parent of the T.J. Maxx and Marshalls chains, sell brand name merchandise, much of it excess inventory returned from department stores, at steep discounts. In December 2009 TJX was a standout with a 14 percent jump in same-store sales. For December 2010, analysts predict a 2.8 percent decrease.

December was also a big test for teen retailers, particularly Aeropostale, which reported weak November sales and, according to the New York Post, has hired a strategic advisor to fend off any unwanted advances by buyout firms.

Analysts expect Abercrombie & Fitch to report a same-store sales increase of 9.3 percent, aided by higher prices and more modest promotions than its peers.

In contrast, Aeropostale and American Eagle Outfitters slashed prices on many items throughout the holiday season and are expected to report modest same-store sales declines for December.

Reporting by Phil Wahba; Editing by Phil Berlowitz and Tim Dobbyn