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Some Analysts Foresaw Weak Holiday Retail Sales

December 30, 2002|Greg Cresci and Brian Kelleher | Reuters

NEW YORK -- The few Wall Street analysts who recently lowered their ratings on some of the nation's biggest retailers are sitting pretty, as the industry faces its worst holiday sales season in 30 years.

Analysts from Salomon Smith Barney and CIBC World Markets downgraded companies such as discount store group Target Corp., warehouse club operator Costco Wholesale Corp. and electronics chain Circuit City Stores in November.

Since the beginning of this month, the Standard & Poor's retail index, which includes Target, Costco and Circuit City, has fallen more than 10%.

A look at analyst upgrades and downgrades over the last two months shows that market watchers were much more optimistic on the stocks they cover, according to data from Starmine, which tracks their recommendations.

But Salomon's Deborah Weinswig and CIBC's Dan Wewer were most prescient with their bearish calls.

On Nov. 7, Weinswig put "sell" ratings on shares of Target and Costco, citing the potential for weak sales. Since then, Target shares have fallen nearly 8%, while Costco stock dropped 15%. On Friday, Target closed at $28.65 on the New York Stock Exchange, and Costco closed at $27.39 on Nasdaq.

Wewer was ahead of the curve on East Coast chain Tweeter Home Entertainment Group Inc., telling investors to sell shares of the consumer electronics retailer Nov. 18. Just more than a month later, the Canton, Mass.-based company warned that its fourth-quarter profit would be less than half what Wall Street was expecting, and its shares plummeted 34%.

Some market gurus also have been avoiding the sector. Carlos Asilis, chief U.S. equities strategist for J.P. Morgan Chase & Co., rated the retail industry "underweight" -- his lowest rating -- in a report issued Oct. 31.

"Risks to consumer spending are concentrated to the downside, in our view," Asilis said in the report. "Weaker job and wage growth dynamics are likely to reinforce weakening sector earnings expectations."

On the other side of the equation were analysts such as Lazard's Todd Slater and Buckingham Research Group's Barbara Wyckoff, who recently boosted their ratings on key retailers.

Slater upgraded Costco and Target in late November to "buy" from "hold," in part because of a sanguine view of the holiday selling season. In a Nov. 19 note on Target, Slater cited the company's better-than-expected sales results at stores open at least one year and said, "Christmas won't be canceled."

But shoppers didn't come out in force during the following weeks, as fears over everything from job losses to a possible war with Iraq and high oil prices restrained the freewheeling ways that have made consumers the cornerstone of the U.S. economy.

On Dec. 12, at the height of the holiday shopping season, Costco warned that its profit for the current quarter would fall short of Wall Street estimates.

Buckingham's Wyckoff raised her rating of San Francisco-based Gap Inc. and Columbus, Ohio-based Limited Brands Inc., both apparel retailers, to "buy" in November. Shares of both have fallen in December.

Across the industry, the holiday season seems soft. Wal-Mart Stores Inc. all but gave up hope that post-Christmas shopping sprees will make up for sluggish pre-holiday sales, cutting its December outlook the day after Christmas.

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