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The equity trade will see a number of retailers report profits this week.  Retail is the last major sector to release profit results and will help finalize the view of the Q2 profit period.   The SPDR Retail ETF (XRT) is trading just off its 52-week high despite the fact that retailers have provided uneven results in the past week.   The chart displays the trend.

A summary of the mixed mood:

In recent sessions, American Eagle ((AEO - Analyst Report)) and Aeropostale (AEO - Analyst Report) guided profit expectations lower, while Ralph Lauren (RL - Analyst Report) reported a disappointing quarter.   However, Michael Kors (KORS - Analyst Report) reported stronger than expected results, and Cato guided its earnings to the high end of the forecast range.  Lastly,  Gap Stores (GPS - Analyst Report) guided its Q2 EPS forecast higher, but its July same store sales were short of estimate.

The background for this week:

The table below displays a list of retailers reporting profits this week.  The table highlights the number of positive earnings surprises in the last ten earnings releases and the date of the last negative earnings surprise. It also provides Zacks Earnings ESP and the Zacks Consensus Earnings Estimates for the reporting and coming quarters.  The ESP is a proprietary method for determining which stocks have the best chance of surprising in their next earnings announcement.  The percentage, if available, provides the expected surprise prediction.

Table highlights:

M has the strongest track record of meeting or beating earnings estimates.  It has not disappointed investors over the last ten quarters. The last miss was May 2007.   DDS and KSS have the next best track records. However, DSS last missed profit estimates for the January 2013 quarter. KSS has not missed a profit estimate since at least 2006, although it matched estimated twice in this period.

The Zacks ESP suggests that NWY has the best chance of posting a positive earnings surprise this week.   DKS had the most negative ESP and seems most vulnerable to creating disappointment.

Seven of the eight stocks in the table are Zacks Rank #3 (hold) and one, KSS, is a Zacks Rank #4 (sell).  This is an indication that earnings estimate revisions have been broadly neutral for the sector.  It is curious that retail has performed well in 2013, while earnings estimates for a number of high profile department store and general merchandise retailers have been neutral compared to the market.  

Looking forward:

The price reaction of these retailers to their earning results may depend more on the guidance for the coming quarter than the reported results.   The flavor of back to school spending will shape the outlook for economic growth and lay the foundation for consumption during the holiday period when retailers bag most of their profits.  The trade is interested in any impact from the slowdown in refinance activity, and the ability of consumers to spend in light of a falling savings rate.

Conclusions:

There are three insights from the table. First, NWY seems to have the best chance of positing a positive earnings surprise.  Second, M has an impressive track record of surprising investors with favorable earnings news. Third, despite the run up in the retail sector, analysts are not expecting overly exciting results.  Solid results with firm guidance could be the catalyst to take the S&P 500 over 1700.  In contrast, a poor outlook for spending in back half of 2013 could lift the case for taking profits and solidify the 1700 hurdle.

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