Earnings Preview: Three Retail Companies That Could Surprise

Last week, I advised investors to keep Dramamine by their side. This advice continues to hold.

Here’s why. Fear about the credit crisis has worsened to the point that the Fed was forced to abandon its hawkish stance on inflation and cut the discount rate. Although the move was intended to reassure lenders that the Federal Reserve will do what is necessary to ensure that the banking system remains liquid, it also creates concerns about how bad the crisis really is. The fear about the credit crisis seems to be worse than the actual problem itself, but fear is a powerful force.

Unfortunately, there isn’t much in the way of scheduled releases to alleviate fears over the next five trading days. The earnings calendar is limited to just 97 companies, 13 of which are members of the S&P 500. Retailers will again be front and center with the likes of Abercrombie (ANF), GAP (GPS), Limited (LTD), Lowe’s (LOW) and Target (TGT) reporting. (Approximately half of the 97 companies scheduled to report earnings will be retailers.) The economic calendar has July Leading Economic Indicators being published on Monday and July durable goods orders and new home sales data slotted for Friday.

Simply put, at a time when investors could really use some reassuring news, there won’t be much. The number of earnings estimate revisions will be on the decline as companies pass mid-quarter and are not likely to give much in the way of revised guidance. (This is neither a positive nor a negative, but rather just a factor of the calendar.) Deal volume tends to be lower in August simply because so many people are on vacation and/or getting kids ready for school. Even the Stock Trader’s Almanac has nothing to say other than Wednesday and Friday should be bullish days, based on past trends.

Besides keeping Dramamine by their side, investors should use this period of time to research stocks. When markets get volatile, the natural tendency is to move money into money market funds and think about anything but investing. Rather, investors would be well served to double-up their research efforts and find fundamentally strong stocks with rising earnings estimates that are trading at reasonable valuations. A disciplined dollar-cost averaging strategy now can result in notable profits being realized in the future. In other words, buy fear.

Companies That Could Issue Positive Earnings Surprises during the Week of Aug 20 - 24

All of the covering brokerage analysts raised their full-year forecasts on Gap (GPS) after the company said that it would probably report second-quarter profits within a range of 19 to 20 cents per share. Prior to the new guidance, the consensus estimate had called for profits of 13 cents per share; now it calls for profits of 19 cents per share. GPS’ revised guidance comes after the company achieved a 2% rise in July same-store sales for its namesake stores and a 1% increase at Banana Republic stores. (Old Navy same-store sales plunged 18%, however). The company also noted that it was also able to achieve higher margins. GPS has exceeded expectations for six consecutive quarters. Gap is scheduled to report on Thursday, Aug 23, after the close of trading.

Gymboree (GYMB) reaffirmed its raised EPS guidance of 13 to 15 cents per share earlier this month. The reaffirmation occurred as the company said July same-store sales rose a respectable 5%. Brokerage analysts held their profit forecasts steady at 15 cents per share in response to the July numbers, though the consensus estimate is three cents above the average forecast of 30 days ago. GYMB has exceeded expectations for three consecutive quarters. Gymboree is scheduled to report on Wednesday, Aug 22, after the close of trading.

Companies That Could Issue Negative Earnings Surprises during the Week of Aug 20 - 24

Pacific Sunwear of California (PSUN) recently cut its non-GAAP second-quarter profit guidance to a range of six to seven cents per share. The revision followed a 4.6% drop in July same-store sales and weak gross margins. Most of the covering brokerage analysts lowered their projections in response, causing the consensus estimate to drop by 10 cents to seven cents per share. PSUN has missed expectations twice during the past four quarters. Pacific Sunwear is scheduled to report on Thursday, Aug 23, after the close of trading.