What Will Drive Retail Stocks Higher?

Although many retailers turned in rosy same-store sales for January, the stocks are showing it is far too soon to declare the worst over for the retail sector.

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Like the broader market, retail stocks are trading lower, with few exceptions. What gives?

Brian Sozzi, a retail analyst for Wall Street Strategies, says investors are realizing that the continued cost-cutting by retailers is not going to pack the same punch as last year.

"There were a diminishing number of earnings raises," Sozzi said. "For those companies that did raise guidance, the magnitude was lower than evidenced earlier in the year. Face the facts, retailers have already trimmed their cost structures significantly. They need sales to drive added upside to consensus forecasts."

The other key is what first-quarter forecasts will look like when these companies report their fourth-quarter results.

For a peek, I suggest you watch CNBC's interview with Macy's CEO Terry Lundgren. Macy's is one of the few retail stocks posting gains Thursday.

Macy's not only trounced analysts' monthly sales estimates for January, it also raised its earnings forecast. But even with this encouraging performance, Lundgren struck some cautious tones in his comments.

Although he saw some improvement in the retail environment in January, Macy's isn't getting overly optimistic for 2010. In fact, Lundgren continues to expect unemployment will remain high this year.

"I'm not modeling job growth for 2010," he said. "I don't expect that there's going to be significant improvement at all for at least for the first six months of 2010 on the jobs number."

Lundgren's observations are noteworthy. Not only does he oversee one of the largest department store chains in the U.S., but he is the chairman of the National Retail Federation.

According to Lundgren, retailers account for one out of every five jobs in the U.S.

He has gotten to speak with Treasury Secretary Tim Geithner at least three times in the past year and those conversations have focused on job creation.

"Jobs is the issue and the retail industry is where I think we need to focus," Lundgren said. "Look, the reality is that if the consumers are consuming again...that's two-thirds of GDP in America...that's when the jobs will grow again."

With comments like those, it's tough to expect that retailers will be racheting up earnings projections significantly for 2010.

This underscores the comments many analysts are making that the easy gains in the retail sector are behind us. What will matter most now is the good management decisions that will help these companies to take market share.

Lundgren's comments also echo some of the concerns that are impacting trading today as the latest Labor Department report showed that the number of workers filing initial claims for jobless benefits unexpectedly rose, proving that layoffs are continuing and jobs remain scarce.

John Silvia, a chief economist at Wells Fargo, said he expects the job picture will worsenagain before it truly recovers as once discouraged workers try to find employment.

On Friday, the Labor Department will issue its monthly employment figures for January. Although a small gain in jobs is projected, the unemployment rate is expected to remain around 10 percent.

But Silvia expects non-farm payrolls will shrink by 68,000 in January.

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