Can You Trust This Rosy Retail Picture?

Checkpoint Systems (NYS: CKP) came into this week's second-quarter report bearing a heavy cross. Each of the last twoquarterly updates sent the stock reeling amid missed estimates and a lack of reassuring language from management. The maker of security and inventory management systems for retail stores has seen falling revenue and shrinking margins, and that combination is a terrible way to make more money.

Unfortunately, Checkpoint couldn't turn things around this time, either. With non-GAAP earnings of $0.31 per share on $220 million in revenue, the company met earnings expectations, but missed revenue estimates by a country mile. That contradictory slate of results, coupled with a midday earnings call, led to some weird trading. Checkpoint opened sharply lower, retraced to a small gain, and then slowly plunged to a closing price nearly 8% below the previous day's.

Not to be confused with data-security expert and dual Fool newsletter recommendation Check Point Software Technologies, this Checkpoint competes with industrial giant Tyco International (NYS: TYC) in multiple markets. It also rivals fire and intrusion detection products from Stanley Black & Decker (NYS: SWK) , and product labeling systems from Avery Dennison (NYS: AVY) . All in all, the company is sort of a Western counterpart to China Security & Surveillance Technology (NYS: CSR) .

The company is vulnerable to swinging capital improvement trends in the retail industry, because that's where all its customers operate. At the moment, that's bad news. However, management sees light at the end of the tunnel.

"Despite the general consciousness about an economic recovery, selected retailers are spending to confine theft," said CEO Rob Van der Merwe. "We believe this will accelerate in the second half of the year based on our order outlook, and activity we can see in the pipeline." So Checkpoint has some hard order data to back up its rosy outlook.

But Checkpoint's track record in living up to expectations is remarkably tarnished, especially in 2011. Rather than taking Van der Merwe's words as gospel, I'd advise Checkpoint investors -- both current and prospective -- to keep a close watch on broader retailing trends instead. When that sector gets back on its feet, Checkpoint should follow in short order.

At the time thisarticle was published One easy way to do that is to add a few important retailers to yourFoolish watchlist. Justclick here to get started. To learn more about the retail business, have a look atthis free reporton retail winners in the age of online consumer sales.Fool contributor Anders Bylund holds no position in any of the companies discussed here.Motley Fool newsletter serviceshave recommended buying shares of Check Point Software Technologies. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. You can check outAnders' holdings and a concise bio, follow him onTwitterorGoogle+, or peruseour Foolish disclosure policy.

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