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Symptoms of a Rotten Retail Stock

Retail shoppers
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Retail shoppers

Big retailers including Costco Wholesale, Macy’s, Target, and Kohl’s reported June sales on Thursday that failed to meet estimates. Some retailers even changed their earnings forecasts as a result. As the back-to-school season and the holidays get closer, a rotten retail stock could start to stink. Here’s what analysts are looking out for.

Costco reported a 3 percent increase in same-store sales, falling below estimates of 3.7 percent. “It’s estimated that 100 basis points of Costco’s June (same-store sales) was impacted by the shift of the July 4 holiday,” Dana Telsey of CEO of Telsey Advisory Group told CNBC, citing the mid-week holiday as one of three factors contributing to June’s same-store sales decline.

While big box retailers such asTarget and Costco reported disappointing sales, Wal-Mart Stores hit a new 52-week high on Thursday. Telsey said Wal-Mart’s 2.6 percent increase last quarter suggests that it is likely taking share from some of its big box competitors. She expects Wal-Mart to continue to gain share moving forward.

An additional factor that likely swayed June same-store sales is weather. “The fact that it is warmer, they cleared out goods potentially earlier than expected,” Telsey said, noting that it is possible that the weather shifted sales to earlier months.

The weak data and the hot weather have also raised concerns over how the back-to-school period will play out. “If it’s going to stay this hot, the back-to-school merchandise had better be priced competitively in order to move it,” Telsey said.

While retail conditions in the U.S. are not ideal, Telsey’s top retailers of concern are those with international branches. Both Nike and Gap reported a significant drop in international sales.

In North America, Gap reported its fifth consecutive month of positive sales, but its growth was offset by a 14 percent decline in international revenue. “I think international is a cause for concern,” Telsey said, explaining that retail sales in London and China are more cautious and promotional than expected.

Telsey warned investors that any retailer with exposure to Southern European countries such as Spain, Greece, or Italy should be concerned.

Although June was a tough month for retailers, the sector is far from barren.

Telsey expects a good season for retail in the U.K. this quarter with the Olympics in July.

One of her top picks is Limited Brands. Victoria’s Secret, which is set to open a store in London, reported a 7 percent rise in June sales, exceeding its estimated 2.7 percent gain. Telsey attributed the recent success of Limited to its Pink category, which expanded beyond intimate apparel and introduced lounge-wear. The company’s continuous flow of new product launches at competitive prices has also made it a strong competitor, Telsey said.

Anticipating the holiday season, her top picks are Limited, American Eagle, Macy’s, and Nordstrom’s.

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—By CNBC.com’s Madeline Laskoski

Additional News: Economic Fears Take Toll on Retail Sales in June

Additional Views: Top 10 Emerging Markets for Retailers

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CNBC Data Pages:

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Disclosures:

Telsey Advisory Group (TAG) does not have holdings in any securities covered by TAG. No TAG analyst has any holdings in any security he/she covers. TAG analysts do not receive compensation from subject companies.

TAG provides investment banking and other non-investment banking securities related services, and non-securities services and may seek such relationships from companies about whom it provides research.

TAG, its employees, and their households have no other conflicts or potential conflicts of interest.

Disclaimer

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