Five retail stocks to watch

Home Depot, Nordstrom and Aeropostale could beat fourth-quarter earnings estimates.

By TheStreet Staff Feb 18, 2010 4:31PM

TheStreetBy Jeanine Poggi, TheStreet


Don't expect too many surprises from retailers' fourth-quarter earnings reports. Most companies cut costs dramatically in 2009, so modest sales growth could boost earnings, says Craig Johnson, president at Customer Growth Partners, a retail consulting firm.


Investors should look for stable prices, sequential sales growth and commodity forecasts. The strongest retailers will be able to increase sales without giving up margin gains from the past year, says Chandi Neubauer, an analyst at Majestic Research. Steer clear of retailers that plan to add US stores in 2010 or even 2011, says Wall Street Strategies analyst Brian Sozzi. The domestic economy must strengthen before companies can resume growth.


These retail stocks offer good upside potential:


Home Depot (HD): It's no secret that Home Depot is an investor favorite in the home-improvement sector. During the fourth quarter, Home Depot's big-ticket sales began to rebound and its holiday and seasonal merchandise had a strong showing, Citigroup (C) analyst Deborah Weinswig wrote in a report.


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While apparel retailers bemoan the effects of weather on business, for home-improvement retailers it is a legitimate concern, JPMorgan Chase (JPM) analyst Christopher Horvers wrote in a research note. Home Depot, however, is benefiting from cold temperatures and heavy precipitation.


"An incremental lift to comparable sales may be driven by the fact that the South and Southeast experienced much of the cold and snow," Horvers wrote. "With residents unaccustomed to such weather, we believe it brought solid sales of heaters, salt, shovels and even some snow blowers."


The fourth quarter is an easy one for Home Depot in terms of sales comparisons. As a result, "investors are looking past the current quarter in anticipation of the potential for positive comparable sales in the spring selling season, which has a multitude of tailwinds that could drive revenue and earnings upside," Horvers wrote.


Ahead of its Feb. 23 earnings report, Oppenheimer upgraded Home Depot to “outperform” from “perform.” Analysts expect the company to earn 16 cents a share on revenue of $14.06 billion.


"Home Depot is a name to own into earnings as we expect the company to provide a favorable 2010 outlook as the housing market improves and Home Depot realizes greater benefits from its merchandise and supply chain initiatives," Weinswig wrote.


Nordstrom (JWN): Nordstrom is the shining star of the luxury sector heading into fourth-quarter earnings. The high-end department store already reported same-store sales at the beginning of the month that were significantly higher than anticipated.


And since Nordstrom has a tendency to refrain from updating guidance in the middle of the quarter, Weinswig is confident that its earnings results will beat expectations. Analysts are calling for earnings of 78 cents a share on revenue on $2.53 billion.


Nordstrom has seen success with its good, better, best pricing strategy and its beefed-up juniors business. One of the only challenges remaining is its men's business, Johnson says.


Macy's (M): Macy's could bring an element of surprise to the department store sector. Weinswig says results may top company guidance.


Macy's boosted its forecast after reporting a surprise increase in January same-store sales. The company now expects earnings of $1.35 to $1.37 a share. Weinswig predicts earnings could hit $1.38 per share.


The department store has seen strength in online sales, Macy's localization initiative and its Bloomingdale's business. Macy's will roll out four Bloomingdale's outlets in 2010.


While Macy's is well-known for providing conservative guidance, Weinswig says investors may be surprised by its 2010 outlook.


American Eagle Outfitters (AEO): After more than a year of declining same-store sales, American Eagle Outfitters saw its business begin to turn toward the end of 2009. In fact, it now has one of the strongest trends in the specialty retail segment, Sozzi says.


Analysts are forecasting fourth-quarter earnings of 33 cents a share on revenue of $962.2 million.


American Eagle's biggest advantage heading into spring are its plans to shorten lead times. This means it will be able to quickly replenish popular merchandise without worrying about ordering excess product that may not sell.


For the fourth-quarter, investors will be waiting to see if management provides any update on the future of contemporary chain Martin + Osa, which has been a drag on earnings. Neubauer doesn't think management will provide a direct answer on whether they will shutter the division.


Aeropostale (ARO): No matter what Aeropostale does, Wall Street keeps beating it down.


Still, the teen retailer has reported 14 consecutive quarters of earnings growth, and the fourth quarter isn't expected to be an exception. Analysts are calling for earnings of $1.42 a share on revenue of $791.8 million.


Consumers are still focused on Aeropostale's value message, which won't change in 2010, Sozzi says. The company also has significant opportunity with its newest children's concept P.S., which targets an underserved segment in the market.


Nonetheless, analysts don't foresee much upside to the stock. The reason: investors are more focused on turnaround stories -- like Gap (GPS) or Abercrombie & Fitch (ANF) -- than solid, steady companies, Neubauer says.


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Home Depot remains top analyst pick



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