Retailers Turn Cautious On Financial Outlooks

--Most retailers topped Wall Street expectations for the second quarter

--But many have given negative third-quarter outlooks, more than double those with positive forecasts, data shows

--Because of economic uncertainty, retailers may slow share repurchases in order to conserve cash

 
   By Andria Cheng 
 

Retailers, from Limited Brands Inc. (LTD) to Ross Stores Inc. (ROST), reported better-than-expected second-quarter results, but many have in turn offered cautious outlooks, citing the global economic uncertainty and market volatility.

About 80% of the companies in the consumer discretionary sector have topped Wall Street expectations with their second-quarter announcements, according to Thomson Reuters data.

Still, 38 of those in the sector have given negative third-quarter outlooks, more than double the 16 with positive forecasts, Thomson Reuters data showed. Overall, Wall Street's third-quarter profit projection has slowed to an average increase of 19.4% as of Aug. 16, down from 21.7% that analysts had been looking for back on April 1.

"As we look to the back half of the year and into 2012, it is clear that we are entering a period of greater uncertainty," said Michael Jeffries, chief executive of Abercrombie & Fitch Co. (ANF), on Wednesday, when the company projected a lower third-quarter margin on increased costs.

The teen retailer's stock dropped 5% on Thursday, after tumbling almost 9% on Wednesday.

With the uncertainty in the market place, Citigroup analyst Deborah Weinswig said in a recent report she expects retailers to slow the rate of share repurchases in the second half and next year, in order to conserve cash if sales trends weaken -- especially ahead of the critical holiday season.

Retailers' cash needs typically peak in October and November as they bring in holiday offerings and increase hiring for stores. Citigroup has cut its forecast for back-to-school, the second-biggest selling period after the holidays. It also sees a "more muted" holiday sales season.

The S&P Retail Index fell almost 4% in midday trading, amid a drumbeat of downbeat economic news that weighed heavily on Wall Street.

On Thursday, data showed existing-home sales plunged to an eight-month low in July while initial jobless claims rose back above the 400,000 mark last week. Inflationary pressures also appeared to have accelerated with the Labor Department reporting the rate of increase in consumer prices during August saw its biggest jump since March. Food and gasoline prices have both headed higher, as well as apparel prices.

Wal-Mart Stores Inc. (WMT), the world's largest retailer, said on Tuesday food inflation has overtaken gas at the pump as customers' biggest household expense concern.

Ross Stores, which sells name brand products at a discount, on Thursday forecast a third-quarter profit of as much as $1.04 a share, missing the $1.12 average estimate of analysts surveyed by FactSet Research. Despite better-than-expected year-to-date results, the company said it's not changing its second-half outlook.

"We believe it is prudent to be cautious in our outlook for the back half of the year mainly due to the unknown impact on consumers from the recent stock market volatility and increased economic uncertainty," said Chief Executive Michael Balmuth. "It is also unclear how higher sourcing costs and expected price increases throughout all of retail will impact our business."

Ross shares dropped 3.6%.

Limited Brands, parent of Victoria's Secret and Bath & Body Works, also offered a cautious third-quarter outlook even after it reported another profit and sales upside, driven by full-priced demand at Victoria's Secret. It projected third-quarter profit of 17 cents to 22 cents a share, compared to analysts' average estimate of 22 cents, and sees a lower margin rate because of increased costs.

Still, its shares, after zigzagging in early trading, rose 1.5% -- one of very few gainers in a sharply lower market.

"We believe momentum can continue -- even if the economy slows -- as lingerie and beauty care products are relatively low priced, and purchases are highly emotionally driven," said Lazard Capital Markets analyst Jennifer Davis.

"With its unique product assortment, (Limited) has greater pricing power than many other specialty retailers, so it is more favorably positioned to raise prices selectively and absorb inflation."

-Andria Cheng; 415-439-6400; [e-mail]