Strong First Quarter Predicted for Retailers

Daniel Barry, managing director and retail analyst for Merrill Lynch Global Securities Group in New York City, said the first quarter of 2004 should be a particularly good one for retailers.

“The outlook for sales and earnings in 2004 is bright with especially strong results expected in the first quarter,” Barry said in a research report issued Jan. 5.

He said three trends should dominate retail in 2004:

• Strong first-quarter sales – “Perhaps the strongest sales quarter in years is probable for the first quarter against exceptionally easy comparisons,” Barry said. “Last year’s first quarter was depressed by … the previous year’s post 9/11 sales surge, poor weather especially in February … and the Iraq war, which kept shoppers at home watching TV.” Also, Barry said, about $60 billion in tax refunds and lower taxes are expected to hit consumers’ pockets in March and April of this year.

• Strong first-quarter earnings – “Because net income during the first quarter is, out of all four quarters, the smallest, there is more positive leverage from strong sales during this quarter than in any other quarter,” Barry wrote in his report. “Moreover, inventories were excessive and out of balance in last year’s first quarter following a disappointing Christmas shopping season. This contributed to weak first quarter sales. We expect inventories to be under much better control in the first quarter of 2004, possibly leading to upside earning surprises.”

“Based on First Call projections, the first quarter earnings gain for our retail stock index of the 37 retailers in the S&P 500 is expected to rise 16 percent compared to the consensus forecast for the S&P 500 of 14 percent on a top down basis and 12 percent on a bottoms up basis,” Barry said.

• Sales to slow from strong first quarter – “The pick-up in sales from the second quarter of 2002 through year end as a result of the post 9/11 sales surge was one of the main reasons we turned positive on retail stocks last spring,” Barry said. “However, there could be a slowdown in sales in the final three quarters of 2004 against these increasingly tougher comparisons.”

As a result of stong sales and earnings, retail stocks should perform “exceptionally well” in the first quarter, Barry said. Retail stocks have outperformed the market in 12 of the past 16 calendar first quarters.