Week in Preview: Retail Earnings Expectations

As the earnings season begins to wind down, retail earnings move into the spotlight. Already, JC Penney (JCP), Kohl's (KSS) and Macy's (M) have reported results that topped consensus estimates, though the former two also offered disappointing forecasts. Nordstrom (JWN) met earnings expectations.

Many more retailers are scheduled to post their second-quarter results this week, including Wal-Mart Stores (WMT), Abercrombie & Fitch (ANF) and Dollar Tree (DLTR), whose earnings expectations bear a closer look.

Expectations for the World's Largest Retailer

During the three months that ended in July, Wal-Mart announced a share buyback program and outlined the "next generation" of Wal-Mart. Analysts surveyed by Thomson Reuters expect the world's largest retailer to report that earnings per share came to 96 cents, an 8.3% increase from a year earlier. Second-quarter revenue is expected to have grown 4.7% to $105.6 billion. So far, analysts predict similar year-over-year growth of both earnings and revenue in the third quarter as well. Earnings results have narrowly topped consensus estimates in the past four quarters.

Wal-Mart's long-term earnings per share growth forecast is 10.6%, which is better than the retail average. The earnings multiple of 12.4 times is less than the industry average and that of competitor Target (TGT). The First Call analysts' recommendation has been to buy Wal-Mart for more than 90 days. The mean price target on shares is currently $60.23. After recently falling to a 52-week low of $47.77, shares have climbed back and closed the week at $50.40.

Like Wal-Mart, home improvement superstores Home Depot (HD) and Lowe's (LOW) also are expected to post modest earnings growth when they report results this week.

High Expectations for Abercrombie and Many Others

Despite the mixed retail sales numbers for July, analysts expect many retailers to report double-digit earnings growth this week. Those companies include Aeropostale (ARO), AnnTaylor Stores (ANN), BJ's Wholesale (BJ), Chico's FAS (CHS), Limited Brands (LTD), PetSmart (PETM), Ross Stores (ROST), Target, TJX Companies (TJX) Urban Outfitters (URBN) and Williams-Sonoma (WSM).

But Abercrombie & Fitch is forecast to be one of the week's best in terms of earnings growth. Analysts anticipate that the Ohio-based purveyor of upscale casual attire will report earnings of 16 cents per share, compared to a loss of 9 cents in the same period of last year. During the three months that ended in July, Abercrombie saw strong sales in May and June, and analysts expect revenue for that period to have risen 14.2% to $727.7 million. Thus far, the consensus forecast is for sequential and year-over-year earnings and revenue growth in the third quarter. Abercrombie's earnings have met or beat analysts' expectations in the past three quarters, though it posted a loss in the first quarter.

The long-term EPS growth forecast of 20% tops that of competitors such as American Eagle Outfitters (AEO) and Gap (GPS). The earnings multiple is 19.7, but that's down from the trailing price-earnings ratio of 30.4. Abercrombie keeps more than enough cash on hand to cover long-term debt, but this dividend payer's net cash flow from operations did fall into the red in the previous period. Yet the consensus recommendation shifted from holding to buying Abercrombie in the past 90 days. The mean price target on the shares is $46.15. The share price was $37.66 at Friday's close, after rising 13% in the past few weeks from near its 52-week low. They may be ready to break above the 100-day moving average for the first time since May.

Bargain Stores Do Well in Recession

Dollar Tree, which has benefited from the recession and slow recovery, announced a stock split and share buybacks during its second quarter. Earnings for that period are expected to total 54 cents a share, which is up from 42 cents in the same period of last year. The Chesapeake, Va.-based discount retailer's revenue for the three months ended in July is expected to come to $1.4 billion, or 10.1% more than a year earlier. And analysts foresee sequential and year-over-year earnings and revenue growth in the third quarter as well. The per-share earnings have beat analysts' expectations in the past five quarters, by as much as 6 cents a share.

Dollar Tree's long-term EPS growth forecast of 14.4% exceeds that of competitor Family Dollar Store (FDO). The 14.9 earnings multiple is less than the trailing PE ratio of 17.2. Dollar Tree keeps enough cash on hand to cover long-term debt, and analysts on average recommend buying Dollar Tree, with a mean price target of $48.05 per share. The stock has been slowly rising since March and recently reached a record high of $45.49.

Not So High Expectations

Those companies are anticipated to report EPS results in the same ballpark as a year ago: Casual Male Retail (CMRG), Gap, Gymboree (GYMB) and Kirkland's (KIRK).

But analysts are expecting some reports of losses as well. While the losses from Bon-Ton Stores (BONT), Children's Place Retail (PLCE), Saks (SKS) and Sears (SHLD) are expected to be narrower than a year ago, the loss from Hot Topic (HOTT) is not.