For retailers, Xmas is only kind of blue

Macy's and Kohl's both raised profit targets. Good news, right? But results were deemed 'disappointing' because they didn't live up to pie in the sky forecasts.

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By Paul R. La Monica, CNNMoney.com editor at large

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Investors are betting heavily on the consumer. The S&P Retail Index (RLX) has outperformed the S&P 500 since the market bottomed.
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NEW YORK (CNNMoney.com) -- Welcome to the bizarre world of Wall Street where good news is often bad news simply because it isn't good enough.

For anyone who was wondering if this year's stock market surge was perhaps running out of steam, look no further than what has happened to retailers in the past few days.

Macy's announced Wednesday that it was boosting its full-year earnings target to between $1 and $1.05 per share. That's an increase from its prior guidance of 70 cents to 80 cents a share.

Yet, the stock plunged 8% as traders bemoaned the retailer's weak holiday outlook. Huh? The company raised its forecast by about 35% and that's a disappointment? Well, it was to analysts. They were predicting that Macy's (M, Fortune 500) was going to earn $1.11 a share this year.

This reaction is troubling. Many experts who are fearful that the market has come too far too fast believe that investors have impossibly high hopes for an economic recovery.

And you don't have to look any further than the overly optimistic earnings estimates for retailers to see that the skeptics may be right.

"It's a tug of war. On one side, analysts are raising estimates but some companies don't want analysts to be that aggressive. It's gamesmanship. It's all about controlling expectations," said Todd Campbell, president of E.B. Capital Markets, a Durham, N.H.-based research firm catering to institutional money managers.

The same thing happened with Macy's rival Kohl's (KSS, Fortune 500) on Thursday. The department store chain announced that it was raising its earnings forecast for the fourth quarter to a range of $1.14 to $1.24 a share. Its previous guidance was for a profit of 99 cents to $1.06 a share.

But that didn't satisfy Wall Street analysts who were expecting Kohl's to post earnings of $1.25 a share during the holiday shopping season. So in some headlines about Kohl's, the forecasts were described as "soft" and "falling short."

That doesn't make sense when you look at the actual numbers compared to a year ago, as opposed to myopically focusing on analysts' earnings targets.

If Kohl's fourth-quarter results come in at just the lowest end of its new forecast, that will represent growth from a year ago. At the high end, it would be a gain of 13%.

Fortunately, investors had a more reasonable reaction to Kohl's forecasts than they did to Macy's. Shares of Kohl's were flat Thursday morning. In addition, investors didn't punish retail kingpin Wal-Mart Stores (WMT, Fortune 500) for what some described as a "light" fourth-quarter forecast.

The discount leader announced Thursday morning that fourth-quarter earnings would be in a range of $1.08 to $1.12 a share, which implies that they could miss Wall Street's consensus estimate of $1.12 a share. The stock rose 1% in early morning trading, however.

So it is encouraging that investors may be focusing more on the absolute than the relative. Wal-Mart, like Kohl's, is forecasting an increase in profits for the fourth quarter. (Mind you, it would be hard to not show improvement from last year's disastrous fourth quarter.)

Still, it's a concern that Wall Street's estimates for some retailers may be out of line with reality. The new forecasts from Kohl's, Wal-Mart and Macy's do seem to be further evidence that the holiday shopping season may not be an absolute bloodbath for retailers. Yes, Virginia there is a Santa Claus.

At the same time, consumer spending is hardly robust. It's worth pointing out that sales for Macy's, Kohl's and Wal-Mart are still sluggish at best. Many retailers are going to have to resort to big price wars to get people in the doors.

But shares of many prominent retailers, like the broader market, have surged since stocks hit their lows in March. The S&P Retail Index is up more than 75% in the past eight months while Macy's, Target (TGT, Fortune 500) and J.C. Penney (JCP, Fortune 500) have all doubled.

This strong rebound is a sign that investors must believe the economy, and ergo, consumer spending is improving. Again, this is probably true. But investors and analysts may be getting ahead of themselves.

According to John Butters, director of U.S. earnings research with Thomson Reuters, analysts have raised their fourth quarter earnings estimates for the S&P 500 by about 3% to 4% since the start of the quarter in October.

That's a marked change from what had been taking place in the past year or so. Butters said that throughout the recession, it was far more common for analysts to cut their profit targets for companies as the quarter wore on.

It looks like retailers are trying their best to talk down expectations. Of course, they have a good reason to do so. No company is willing to risk the wrath of shareholders by missing their earnings targets.

With that in mind, Campbell said he does not think that estimates for retailers -- and other companies for that matter -- are factoring in too much euphoria just yet.

"Analysts always underestimate earnings power coming out of a recession and overestimate it during a recovery and at the peak. Analysts are still playing catch up," he said. "This is more reflective of companies trying to low-ball estimates. They want to underpromise and overdeliver."

That's all well and good. But what happens if more companies think they are overdelivering only to find that they haven't delivered enough?

As long as analysts keep raising their estimates, the chances of companies underwhelming Wall Street increases -- and that could put the rally in jeopardy.

Talkback: Do you plan to spend more or less on gifts this holiday shopping season than you did last year? Share your comments below. To top of page

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