Market Overview

Are Retail Stocks a Value Play or Value Trap?

As more details emerge about the disappointing holiday season, analysts have lowered ratings and expressed concern about earnings announcements set to hit the street in the coming weeks.

Holiday sales can account for as much as 40 percent of a retailer's annual revenue, making December sales one of the most important metrics for investors. With the less than impressive news coming from some retail names, are they setting up as value plays? Or is further downside ahead?

Target (NYSE: TGT) traded up nearly three percent intraday after reporting flat same-store sales. However, CEO Gregg Steinhafel said he expects the company to meet or top the low end of its previous outlook.

But on Wednesday, Jefferies downgraded the company from Buy to Hold and lowered its price target from $74 to $59.

Limited Brands (NYSE: LTD) was down more than 5.5 percent after disappointing same store sales. The retailer reported an increase of three percent versus analyst forecasts of 4.5 percent — a rare miss for the owner of popular retailer Victoria's Secret.

Kohl's (NYSE: KSS) was up 0.25 percent after reporting same-store sales growth of 3.4 percent, but cutting its fourth quarter earnings forecast. On Wednesday, Buckingham Research cut its rating to Neutral and slashed its price target 25 percent to $45 — only six percent higher than its current level.

The report said that disappointing fourth quarter sales as well as elevated inventory levels and gross margin pressure may keep the retailer in a trading range for much of 2013.

Dillard's (NYSE: DDS) is flat on the day after reporting three percent same store sales growth in December -- in line with analyst expectations. The retailer had a disappointing December where it lost nearly six percent of its value.

The worst performer of the retailers that reported Thursday was teen retailer Wet Seal (NASDAQ: WTSLA) — down 1.25 percent intraday. Same store sales declined 9.7 percent — much more than analyst expectation of only five percent.

Consensus

The street is not expecting much from the retail sector once earnings season gets underway, but be careful counting them out altogether. Two unprecedented events took place that put significant pressure on retailers.

First, Superstorm Sandy ravished the east coast causing up to $50 billion in economic damage according to EQECAT. Second, the fiscal cliff threatening to send tax rates soaring for an already shaky American consumer likely affected December spending.

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