Earnings Preview: It’s Retail’s Turn

Earnings season is almost over, and next week just 186 firms report (versus almost 1000 a week not too long ago), including 25 in the S&P 500. The list is dominated by the retailers, many of who have fiscal periods that ended in April, not March. Retailers reporting next week include the biggest of them all, Wal-Mart (WMT: 52.12 -0.28 -0.53%), as well as Target (TGT: 55.17 +0.10 +0.18%) and TJX Companies (TJX: 45.25 -0.11 -0.24%).

Outside of retail there are also a few heavy hitters that will weigh in, most notably in Tech, including Hewlett Packard (HPQ: 47.43 -1.29 -2.65%), Dell (DELL: 15.15 -0.29 -1.88%) and Applied Materials (AMAT: 12.95 -0.28 -2.12%).

The week will start out slow in terms of economic data, but will build as the week wears on. On Monday there will probably be nothing to distract investors from their focus on Greece and the rest of the PIIGS. Tuesday brings us a look at the housing market in the form of housing starts and building permits. We also get the Producer Price index. Wednesday brings the CPI. On Thursday, as always, we get initial and continuing unemployment claims as well as the index of leading economic indicators, and one of the regional analogs to the ISM survey, the Philly Fed index.

Monday

No economic data of significance.
Tuesday

Housing starts continue to be very depressed as the huge inventory of unsold homes, both new and used continues to weigh on the market, especially if one considers the shadow inventory of homes where the owners are far behind on their mortgages or already in the process of foreclosure — a large percentage of which will eventually end up on the market. However, starts have begun to inch up off the bottom, and were running at a seasonally adjusted rate of 626,000 in March. That is up from 573,000 in December, but a far cry from the bubble days when starts were regularly over the 2.0 million level. It is unlikely that we will return to those levels anytime soon, but given the low levels, it does not take heroic assumptions to get very large percentage increases. Single family starts were 573,000 in March, up from a low of 481,000 in December.
The best indicator of future housing starts is building permits. In March they were running at an annual level of 685,000, which provides some hope for an increase in starts in April.
In March, the Producer Price Index rose at 0.7%, which is very much on the hot side. However, almost all of that increase was due to higher energy prices, and oil prices have since cooled rather dramatically (although most of the decline has been in May, not April, so there might be another pop in oil prices in the April numbers, but those should be reversed by the time the May numbers come out. The core PPI has been much more sedate, rising only 0.1% in March. Overall, expect low inflation to continue in April.
Wednesday

The Consumer Price Index has also been extremely well behaved of late. In March, it was up just 0.1% on the headline basis and backing out food and energy it was unchanged. On a headline basis, it has not been above 0.2% since October. It looks even better on a core basis, not having exceeded 0.1% since October. There is no reason to suspect that inflation has accelerated in April, or that it will do so anytime soon. The recent dramatic rise in the dollar will help insure that inflation stays under control. Housing which has a very heavy weight in the index through rent and owners equivalent rent is another force that will keep overall inflation, and particularly core inflation, under control. The very low rates of inflation give the Fed the go ahead to keep interest rates very low for a long time to come.
Thursday

Weekly initial claims for unemployment insurance come out. They fell 4,000 in the last week, to 444,000. After a huge downtrend from mid-April through the end of 2009, initial claims have become very erratic so far in 2010, but have very recently been trending slowly downward again. Look for them to fall again next week. If they do, it would make four weeks in a row headed down and we could be more sure that the downward trend has resumed. Longer term, we have made good progress, but not good enough. We probably need for weekly claims (and the four-week moving average of them) to get down to closer to 400,000 to signal that the economy is adding enough jobs to make a dent in the unemployment rate. We are a lot closer now than we were last spring when they were running north of 640,000 on a consistent basis, but still have a ways to go.
Continuing claims have also been in a steep downtrend of late. However, that is in part due to people simply exhausting their regular state benefits, which run out after 26 weeks. If one factors in the extended claims paid by the federal government as part of the Stimulus Program, claims soared last week. Looking at just the regular continuing claims numbers is a serious mistake. They only include a little over half of the unemployed now, given the unprecedentedly high duration of unemployment figures. Last week regular continuing claims were 4.627 million, up 12,000 from the previous week. Extended claims (paid from Federal ARRA funds) were 5.556 million, a decline of 200,000. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks.
The index of Leading Economic Indicators (LEI) has been on a tear recently, with a 1.4% increase in March, the 12th straight month it has increased. It is likely to increase again in April, but probably by a smaller amount.
The Philly Fed Index, a measure of manufacturing activity in the mid-Atlantic states, rose to 20.2 in April. Conceptually, this is a lot like the ISM index, except that zero is the dividing line between expansion and contraction, rather than 50. Thus 20.2 is a very healthy level, and one that is likely to rise a little bit more in May.

Friday

No economic reports of significance.
Potential Positive Surprises

Historically, the best indicators of firms likely to report positive surprises are a recent history of positive surprises and rising estimates going into the report. The Zacks Rank is also a good indicator of potential surprises. While normally firms that report better-than-expected earnings rise in reaction, that has not been the case so far this quarter. While pickings are getting slim, some of the companies that have these characteristics include:

Gap (GPS: 22.96 -0.15 -0.65%) is expected to report EPS of $0.43, up from $0.31 per share a year ago. Last time out, GPS posted a positive surprise of 2.0%, and over the last month the mean estimate for its first quarter earnings is up 10.07%. GPS has a Zacks #1 Rank.

Limited (LTD: 25.45 -0.54 -2.08%) is expected to post EPS of $0.19, up from $0.01 a year ago. Last time, LTD beat expectations by 3.06%, and over the last month analysts have raised their estimates for the about-to-be-reported quarter by 17.2%. LTD is a Zacks #1 Ranked stock.

Sears Holdings (SHLD: 108.34 -2.62 -2.36%) is expected to post EPS of $0.14 down from $0.39 a year ago. Last time out, the company beat expectations by 4.24%. Over the last month, estimates for the quarter are up 288.9%.  SHLD is a Zacks #1 Ranked stock.

Potential Negative Surprises

Hot Topic (HOTT: 6.75 -0.01 -0.15%) is expected to post a loss of $0.05 a share, versus EPS of $0.03 a year ago. Last time they reported in line with expectations. For this Zacks #4 Ranked stock, analysts have cut the estimates for this quarter over the last month by 40.4%.

MF Global (MF: 8.88 -0.13 -1.44%) is expected to earn $0.01 a share this quarter, versus a loss of $0.25 a year ago. This was below expectations by 600.0% last time out (a loss when positive earnings were expected). Analysts have cut the estimate for this quarter by 27.27% over the last month. The stock holds a Zacks #4 Rank.

Sina (SINA: 35.11 -0.30 -0.85%) is expected to earn $0.23, up from EPS of $0.18 a year ago. Last time out, this Zacks #5 Ranked stock disappointed by 125.0%, and over the last month analysts have shaved their expectations for the quarter by 6.29%.