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Retail Round-Up: Proceed With Caution

Tickers in this article: HD TGT SHLD JCP WMT
NEW YORK ( TheStreet) -- Retail earnings have been a success so far, but investors should proceed with caution when looking for investments in the industry.

The S&P 500 Retail Index today reached a new 52-week high after retailers this week reported solid fourth-quarter earnings. The retail index is up nearly 10% so far this year and has advanced almost 20% since its October low.

The increase in the index has coincided with rising consumer confidence resulting from the improving economic environment. While consumers are more confident in their financial positions, it was apparent from the latest round of quarterly reports that they continue to look for bargains when shopping for discretionary items. The other major retail theme seems to be that the luxury consumer remains strong with high-end shoppers out in force and paying full price.

The only two major retailers that missed on earnings were discounters, Wal-Mart(WMT) and Target(TGT) . While investors punished Wal-Mart's stock price for its weak report, Target's stock actually increased as investors were encouraged by the sales trend the retailer is seeing in February, especially the demand for discretionary merchandise which carries higher margins.

Based on stock performance after the earnings report, Sears Holdings (SHLD) and Saks(SKS) were the big winners this week. The former saw its stock jump 18% on new it plans to sell a number of stores to help shore up its balance sheet. Saks' stock was rewarded for that luxury consumer strength.

Commentary surrounding February sales was upbeat for many of the retailers. Favorable weather throughout the month is certainly contributing to this trend, but there is evidence that the bargain retailers are experiencing strength this month. TJX Companies (TJX) , the operator of TJ Maxx stores, Dollar Tree (DLTR) and Target all spoke to better than expected sales trends in February.

Despite good fourth-quarter reports and favorable outlooks from retailers, investors should be selective when looking for retail stock investments. With the run the S&P 500 Retailing Index has had, many retailers trading near 52-week highs, and with gasoline prices on the rise (often considered a tax to the consumer), it could be difficult for retailers to continue the recent run.

Here's a summary of the retailers that reported quarterly results this week:

Tuesday, Feb. 21

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Home Depot (HD)

EPS Beat/Miss: Beat by $0.08

Stock Performance Day of Earnings: 0.4%

Drivers of Beat/Miss: Warm weather in the quarter drove customers to Home Depot stores. This resulted in stronger than expected sales that drove an increase in leverage on the SG&A expense line.


EPS Beat/Miss: Missed by $0.01

Stock Performance Day of Earnings: -3.9%

Drivers of Beat/Miss: Sales at Wal-Mart's international business were lighter than what analysts had expected, but the miss was driven by lower than expected profits in the overall business. The Dow component's strategy to lower prices to attract more customers was successful in that traffic at the U.S. stores did increase in the quarter after six quarters of declining traffic, but margins suffered accordingly.

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