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Before the recent holidays began, I saw many obstacles standing in the way of retailers and the high sales the season typically brings. Apart from the lack of many of the must-have items that used to adorn store shelves starting on Black Friday, there also stood the uncertainty surrounding tense budget negotiations in Washington.

The end result, however, was even worse than most would have anticipated. Holiday sales came in at the weakest level since 2008 and only increased 0.7% from last year, or well below the 3-4% anticipated.

Such a paltry holiday season has not surprisingly left many retailers to severely underperform the overall market. From higher-end retailers such as Macy's (M) and Dillard's (DDS) to more economical chains such as Walmart (WMT) and Target (TGT), most retail stocks are either flat or down slightly since Black Friday. That trend more than likely won't improve as most report earnings over the next few weeks. This is especially true considering analysts still have rather lofty projections following the holiday shopping season.

As an example, Target, Walmart, Macy's and Dilliard's are all expecting fourth quarter earnings to come in between 3-23% higher than last year. Also, with sales in November and December accounting for up to 40% of annual sales for the majority of retailers, the holiday drag could lead to a prolonged slump for retailers' profits as well as future outlooks.

On one positive note, the majority of companies did report strong January sales. However, these figures were skewed by discounts stores were left to provide in order to clear merchandise. One of the few exceptions was Macy's which saw sales at stores open at least a year, jump 11.7% in January thanks to the franchise's ability to get new merchandise into stores quickly.

However, the strong sales in January even for retailers such as Macy's may be short-lived as consumers now feel the full effects of a 2-percentage-point increase in payroll taxes. This increase along with what is still uncertainty regarding the next budget battle set to take place this spring has even the more budget-friendly retailers weary.

Target CEO Gregg Steinhafel recently described customers as showing "discipline in the face of a slow economic recovery and new pressures."

Now some may choose to look into retail stocks as the sector is one of only a few not to partake in much of the overall market's recent success. However, with another looming budget battle on the horizon, consumers may very well choose to tighten spending even more.

Source: Retailers Still In Distress