Why Retail Investors Need to Be Their Own Analyst

Sell-side analysts are often criticized for acting too slow in downgrading companies and lowering estimates, so it should come as no surprise to find retail analysts were late to the game this week with calls on Children's Place(PLCE) and American Eagle Outfitters (AEO).

For the most part, estimates on retail companies have not been altered since the third-quarter, as analysts have remained on the sidelines waiting to see how the holiday season would play out.

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With the hype surrounding Black Friday, it appears analysts were ignoring one critical factor, not taking heavy discounts into account, says Brian Sozzi, RealMoney contributor and chief business officer at Nothing But Gold Productions. "Analysts fell in love with sales and that merchandise was moving out the door in specialty retail, but consumers were buying more at a discount, pressuring operating margins," Sozzi said. Children's Place was downgraded and its price target was lowered by Janney Capital Markets, FBR Capital Markets and Goldman Sachs, only after the company slashed its fourth-quarter outlook on Thursday. It's no secret that the children's apparel retailer made some merchandising missteps, which forced them to rely on heavy discounts during the all-important holiday season. The company now expects fourth-quarter earnings in the range of 85 cents to 90 cents per share, from its previous guidance of $1.19 to $1.24. As a result, Goldman Sachs downgraded the stock to "neutral" from "buy" today, while FBR Capital Markets and Janney Capital Market lowered earnings per share estimates. That's little help to investors who saw the stock drop from $53 to below $50 during Thursday's trading session.American Eagle is another call analysts got wrong, according to Sozzi. Janney upgraded the stock just a day before the teen retailer cut its fourth-quarter outlook, which resulted in a major blow to the stock. While American Eagle's same-store sales for combined November and December soared 12%, aggressive promotions weighed on margins. Eagle now foresees earnings in the range of 33 cents to 35 cents per share, from previous estimate of 40 cents to 44 cents. The day before, Janney analyst Adrienne Tennant said in a note that American Eagle performed well during the holiday season and outperformed its peers. As a result, she raised her rating to "buy" from "neutral".

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"We believe American Eagle Outfitters will be a winner in the teen space, driving [revenue] with promotions that we believe were all planned," Tennant wrote.

Even the credit ratings agencies have been slow to act. After Sears Holdings(SHLD) announced it was closing underperforming stores, the retailer was downgraded by Standard & Poor's two notches this week to CCC+ from B, or further into junk territory.

Sears has been under pressure for some time, but it took S&P this long -- and the announcement of store closures and profit warning -- to decide the flailing department store will "remain under pressure" in 2012. -- Reported by Jeanine Poggi in New York.

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