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Stock Analyst Update

Retailers No Longer the Bargains They Were

Wednesday's Fed rate cut is probably already priced into these stocks.

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What Happened?
Thursday morning, a compendium of retailers reported same-store sales results--sales at stores open more than a year--for the month of December, and the results weren't pretty. Almost all of them released figures below expectations, and at least seven retailers warned that earnings for the quarter ending January 31 would fall below Wall Street expectations. Among the companies warning were TJX  (TJX), Wal-Mart  (WMT), Tiffany  (TIF), Limited  (LTD), Intimate Brands  (IBI), Gap  (GPS), and Abercrombie & Fitch  (ANF). Only one major retailer, Kohl's  (KSS), showed strong results in December, with same-store sales rising 14.8% and total sales rising 37%. Other retailers reporting sales results Thursday included RadioShack  (RSH), with same-store sales and total sales rising 8% and 11%, respectively, Best Buy  (BBY) (+3.7% same-store sales, +11% total sales), Costco  (COST) (+1%, +6%), Wal-Mart (+0.3%, +6.5%), Kmart (KM) (+0.7%, -1.4%), Limited (0%, +2.0%), Target  (TGT) (-0.1%, +5.4%), Sears  (S) (-1.1%, -0.1%), J.C. Penney (JCP) (-1.6%, -2.7%), Gap (-6%, +11%), and Abercrombie & Fitch (-11%, +12%).

What It Means for Investors
We don't think this is the time to go shopping for retail stocks. Despite the Wall Street adage "Don’t fight the Fed," we think Wednesday's 50-basis-point rate cut is already priced into these stocks. And there are some negatives that may cause the stocks to fall from current levels, including a glut of square footage in the specialty retail industry, the unlikelihood of a quick and sustained rebound in consumer spending, and unreasonable valuations being placed on these stocks. In fact, the S&P retail index is currently 30% above its 52-week low, set in mid-October. In general, retail stocks are anything but bargains right now.

Mark Sellers does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.