Retailers: Discounts Won't Help Profits

Highlighted stocks include Amazon.com (AMZN - Analyst Report), BJ's Wholesale Club Inc. (BJ - Analyst Report), Carter's Inc. (CRI - Snapshot Report), Men's Wearhouse (MW - Snapshot Report) and Target Corporation (TGT - Snapshot Report)

Initial holiday sales are encouraging, though it is questionable whether the momentum will last or if the discounts will end up hurting profits.

The National Retail Federation estimated that shoppers spent an average of $373.57 over Thanksgiving weekend, an increase of 7.2%. Store traffic was higher as well at 172 million, versus 147 million last year.

comScore calculated that Cyber Monday sales totaled $846 million, a 15% increase over 2007. Nielsen Online said that Monday traffic to online retail web sites was 10% higher.

For both traditional and online retailers, discounts were the name of the game. Stores marked down everything from GPS devices to Jimmy Choo shoes. And many observers, including Zacks' Senior Retail Analyst Rob Plaza, believe retailers will keep discounting throughout the holiday season and beyond.

The better-than-expected performance last weekend was not enough to prevent many retailers from experiencing an overall decline in November sales, however.

The dual threat of lower margins and frugal consumers have caused brokerage analysts to cut earnings expectations on many retailers, including Amazon.com (AMZN - Analyst Report), Men's Wearhouse (MW - Snapshot Report) and Target Corporation (TGT - Snapshot Report).

Economy Adds To Worries About Amazon

Amazon.com is perceived as being the biggest beneficiary from the increase in online sales. The company also appears to have a hit on its hands with the Kindle reader. However, the company's low price strategy has historically caused concern about its margins. And the recession is only adding another layer of fear.

Within the past 30 days, 4 of the 20 covering brokerage analysts have cut their 2008 profit projections, while 5 have cut their 2009 forecasts. The downward revisions have resulted in AMZN being a Zacks #4 Rank ("sell") stock.

Price Competition A Problem for Men's Wearhouse

Men's Wearhouse said late last month that it expects a drop in fourth-quarter same-store sales. In addition to weaker demand, the company is also struggling with falling margins on clothing as many of its competitors are cutting prices. (I saw suits on sale just about everywhere on Black Friday.)

All of the covering brokerage analysts cut their full-year forecasts following the company's revised guidance. Perhaps more notable is that 3 out of the 4 analysts also cut their fiscal 2010 profit forecasts. MW is a Zacks #5 Rank stock.

Target's Sales Were Off The Mark

Target announced this morning that November same-store sales fell 10.4%, even after accounting for "stronger" Thanksgiving weekend sales. The retail chain has been losing market share to more aggressive discounters.

Nearly all of the covering brokerage analysts have cut their current-year earnings estimates within the past few weeks. Profit forecasts for next year are lower as well. TGT is a Zacks #4 Rank stock.

There Are Some Opportunities In Retail

Not all retailers are struggling. Two that stand out are BJ's Wholesale Club Inc. (BJ - Analyst Report) and Carter's Inc. (CRI - Snapshot Report).

BJ's Wholesale Club announced this morning that same-store sales jumped 6.2% last month, excluding gasoline. The performance was well above the company's guidance for a 2%-3% increase.

The bullish result comes just a couple of weeks after the company topped third-quarter expectations. Nearly all of the 15 covering analysts raised their fiscal 2009 profit projections in response to the earnings results, and it is possible that further upward revisions could be forthcoming. BJ is a Zacks #2 Rank ("buy") stock.

Carter's enjoyed third-quarter same-store sales growth of 6.1% at its namesake stores and 13.2% at its OshKosh stores. Orders from merchants were strong as well. CEO Michael Casey credited an average unit price of "less than $8" for helping sales.

Two of the 3 covering brokerage analysts have raised their full-year forecasts in recent weeks, and 1 of the 3 also raised his 2009 earnings estimate. CRI is a Zacks #1 Rank ("strong buy") stock.

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Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.