Earnings Preview: Expecting Negative Surprises From Pacific Sunwear, Limited Brands

Yawn….This might the best way to describe the last full week of trading in May. First-quarter earnings season is basically done, outside of retailers and some late reporters. The economic calendar is fairly light. And the Friday before Memorial Day tends to be marked by light volume.

So what’s going to move the markets? Merger news will play a role, though given the extremely high number of deals already announced so this year, calling for more mergers to occur is akin to forecasting a sunny day in June – it’s just going to happen. Sentiment remains bullish. The trend in full-year earnings estimate revisions are positive, though the number of revisions – both positive and negative – is going to start falling. At some point the markets are going to pay more attention to the combination of slow and lumpy economic growth and rising energy prices, but until that occurs, the Dow’s upward trend is our friend.

The earnings calendar for the week of May 21 – 25 contains 106 companies, 13 of which are in the S&P 500. Among the more notable names are Gap (GPS), Lowe’s (LOW), Limited (LTD) and Target (TGT).

The economic calendar will stay pretty quiet until Thursday, when April durable goods orders and new home sales data will be released. April existing home sales data will be released on Friday.

Companies That Could Issue Positive Earnings Surprises during the Week of May 21 – 25

Brokerage analysts have been raising their forecasts on Mylan Laboratories (MYL). During the past 30 days, two analysts raised their first-quarter forecasts, pushing the consensus estimate up two cents to 45 cents per share. The Most Recent Consensus is more bullish at 52 cents per share. MYL has topped expectations during each of the past four quarters by an average margin of five cents. Mylan Laboratories is scheduled to report on Thursday, May 24, 2007.

Companies That Could Issue Negative Earnings Surprises during the Week of May 21 – 25

Pacific Sunwear of California (PSUN) recently said that same-store sales fell 16.5% last month. As a result, the company cut its first-quarter guidance to a loss of four to five cents. All 12 covering brokerage analysts slashed their forecasts in response, sending the consensus earnings estimate down to a loss of four cents per share from a profit of seven cents per share. PSUN has missed expectations twice in the past three quarters. Pacific Sunwear is scheduled to report on Monday, May 21, after the close of trading.

Limited Brands (LTD) essentially cut its first-quarter guidance in half following a 1% decrease in April same-store sales and weaker margins. The company noted particular weakness at its Victoria’s Secret stores. All of the covering brokerage analysts cut their forecasts during the past week, lowering the consensus estimate from 24 cents per share to 13 cents per share. LTD’s last earnings report was a penny below expectations. Limited Brands is scheduled to report on Wednesday, May 23, after the close of trading.