Retail Stocks Earnings Preview: Wal-Mart, Target, JC Penney, Federated, AnnTaylor, Gap

Investopedia Advisor submits: For retail stocks, it's earnings season, which means that a lot of companies are either reporting or pre-reporting their second quarter results. It also means a number of stocks in the group will be moving up and down over the next few weeks. But I'm not so much interested in this quarter's numbers.

Instead, I think this is a terrific time to just look at the sector, because one can usually extrapolate same-store-sales numbers, earnings guidance and other data in order to get a hint of what may lie ahead for the remainder of the selling year, heading up to the crucial Christmas period.

Fact is, by analyzing a retailer's financial wherewithal, and listening carefully to management's mid year comments, you can make a lot of money in this group over the next six months.

To that end, below I will review two big name "discounters", two classic department store chains, and two well-known clothiers to give you a better flavor for the trends I am seeing.

Wal-Mart (WMT): For June, Wal-Mart announced that same-store-sales were up 1.2%, well below the 2% analysts had figured. In conjunction with the July 6th release, management reiterated its belief that second quarter earnings should come in between 70 to 74 cents a share, which is in line with previous guidance.

On the surface, that's good news: numbers will be in line with second quarter earnings. But think for a minute. What do you know about Wal-Mart?

Its patrons, for the most part, are more sensitive to other macroeconomic concerns, such as the price of gas (for their car), and electricity.

So, with these commodity prices moving up, and June comparable store sales coming in below previous estimates, I believe that the trend here is downward. Further, I think that management may ultimately be forced to take down Q3 numbers as well.

Another thing I didn't like: in the actual comparable store earnings release, Wal-Mart's CFO Tom Schoewe commented that average ticket prices are helping comparable store sales numbers, and that actual (foot) "traffic was down during the month." This is not a good sign for a company that lives and dies by foot traffic!

Put simply, I think there are better opportunities out there. In fact, I think the stock could probably come down a few points if Q3 numbers are indeed ratcheted down.

Target (TGT): Same-store-sales were up 4.8% in June, above the 4.3% Wall Street analysts were estimating. First call estimates for Q2 are 69 cents per share. And, in conjunction with the June release, management stated that it expects to either meet or beat that number. Further comments were that inventory is in "very good" condition.

See the difference here from Wal-Mart? June's numbers are better then expected. Management says it might beat the actual Q2 number. And most importantly, because it's forward looking, it said that its inventory is essentially tight, meaning that it shouldn't have a bunch of low margin merchandise that it will have to discount heavily at the end of summer, thus reducing Q3 or Q4 numbers. This is a good sign!

Now obviously Target is not immune to an overall decrease in their customer's discretionary income. But its broad product line, and comparatively higher margin merchandise (as opposed to Wal-Mart which sells its wares dirt cheap) mean that the company should be able to weather the storm. I would also suggest that based upon the trend, we could see Q3 earnings ratcheted higher.

In short, I like Target. I also think the stock is worth buying under $50 a share, as I think it has more upside then downside potential from that point over the next quarter or so.

JC Penney (JCP): Comparable store sales were up 4.3% in June, well north of the 2.8% that was expected. Interestingly, management noted in the release that the gains came from children's clothing, fine jewelry and women's accessories. This is important, because it means that although customers are spending on clothing (a necessity), they are also spending on higher end, non-necessity items as well. More importantly, the company upped its Q2 estimates to 65 cents per share, which is a penny ahead of the consensus estimate.

However, I am worried, because management also commented in the release that higher gas prices and interest rates made the company cautious about heading into the back-to-school season. It also conspicuously did not comment on its estimates for Q3.

My take: The good news is already factored into the stock. And although the shares could move higher from here, an initial analysis of recent results, and more importantly of management's comments, make me think the stock has limited upside.

Federated Department Stores (FD): Comps were up 1.7% in June, well below the 2.8% that was expected. Management also stated it expects earnings to come in between 39 and 44 cents for Q2, which is essentially below the 44 cents per share that Wall Street is estimating. They also pegged full year earnings between $1.91 and $2.04 a share, well shy of the $2.17 a share estimate.

Based upon this information alone, I would stay away. It tells me that management, who incidentally had been forecasting a 2 to 3% increase in June comps, doesn't have a good bead on future earnings. It also tells me that there is a lack of communication with analysts, as their earnings estimates are worlds apart.

AnnTaylor Stores (ANN): The high end clothier reported a 12.5% comp store sales increase, well ahead of the 6.1% estimate. The better-then-expected comps were thanks to swift dress and jewelry sales. This is great news!

Frankly, I am left trying to find fault with the company's performance, but am unable to. AnnTaylor obviously has the right product mix, and it hasn't had to discount its wares in order to lure customers into the stores, which is a good thing. What's more, management's comments in conjunction with the comp store sales release were equally upbeat, and focused on the solid momentum.

Thus, I believe that the shares, although trading in the upper-end of their 12-month trading range, have another 10% upside potential in them. The only question in my mind is what the company will do for its next trick. It wowed the socks off of the street this past month. But what's next? Wall Street, often unrealistically, expects continued success.

Can the company deliver? Long term, I don't know. But I do think the shares are worth buying at current levels.

Gap (GPS): June same-store numbers were down 6%, below the negative 5.1% estimate. That's lousy. What's more, the concept's comp store numbers have been either flat or down for 15 of the last 16 months.

Making matters worse, management said in conjunction with the release that the company will be working through summer inventory into July - meaning that it is heavily discounting its merchandise in order to clear the shelves for its fall wares. Clearly, that's not a good sign.

I see no reason to buy this stock. Management didn’t even try to put a positive spin on the results. It also didn't really offer a glimmer of hope for future quarters. So although the stock is trading right near it's 52-week low, my bet is that the shares go even lower from here. Oh, one more thing. Insiders have sold more then 2.3 million shares over the last six months. And although most of these shares were option related, I hardly consider that a vote of confidence from the people who should be the most inspired.

By Glenn Curtis, Contributor - Investopedia Advisor

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

At the time of release, Glenn Curtis did not own any shares of the companies mentioned in this article.