June retail salesThe heat helped loosen up some consumer spending, but careful shoppers kept themselves in check in June, setting the stage for some disappointment among investors in retail stocks.

Comparable sales, for stores open at least a year, were up 3.1%, slightly below expectations, according to a tally by Thomson Reuters. It had projected a 3.2% increase, and most analysts had forecast gains between 3% and 4%. Slightly more than half the retailers followed by Thomson Reuters missed its estimates.

Shoppers did come out to stores as the summer heat
came on to pick up more seasonally appropriate items such as summer clothes. Retailers obliged with holiday promotions for Memorial Day and July 4, but according to most reports, consumers aren't letting go of the purse strings easily.

Promotions Are Key

Some retailers, including Nordstrom (JWN), Target (TGT) and BJ's Wholesale Club (BJ) noted that their comparable sales were aided by increased store traffic offsetting smaller transaction sizes. That's a sign of cautious consumers.

Indeed, some retailers noted that promotions made a big difference. Limited Brands (LTD) reported that comparable sales at Bath & Body Works were down 8% because it cut 10 days from its semi-annual sale. The company estimated that cost the toiletries chain seven to 10 percentage points in comparable sales.

Sales numbers in June were "a mixed bag, depending on what you were selling," which reflects the selective mood of shoppers, says Michael McNamara, vice president of MasterCard SpendingPulse, which combines MasterCard's sales data and survey numbers for other payment forms to gauge overall consumer spending.

SpendingPulse data found women's clothing lagged, while children's clothes sold well enough to push the apparel category up 3.3% in June, after dropping in April and May. And despite the cautious economic mood, jewelry was up 10.1%, while luxury sales dropped 3.9% after a six-month run-up. Luxury sales were likely hurt by the stock market downturn, while midprice jewelers probably benefited from June being a big month for weddings, says McNamara.

Neither Robust Growth nor Armageddon

Shoppers are shifting dollars among categories because the underlying economic trends -- unemployment, consumer confidence and the like -- still aren't strong, he says. But on the positive side, he notes that gasoline prices remain tame, freeing some household budget items.

"Depending on the month, what the country seems to be buying seems to shift from sector to sector, " says McNamara. There seemed to be some sales momentum earlier in the year, but overall, it's neither fast growth nor the debacle of 2008, he notes.

"We're still growing, but we get the feeling that people want to see robust growth or Armageddon. And we don't see either right now," he says. "It's just very mild growth."

Playing the Expectations Game?

That may not be enough to keep investors happy. Several analysts had expected merchants to provide updated guidance for the second-quarter reports coming up next month. The silence among retailers could be a drag on stocks today.

TJX Cos. (TJX), parent of discounters Marshalls and TJ Maxx, was the only major retailer to raise second-quarter guidance, calling for earnings of 70 cents to 73 cents per share and $3.24 to $3.33 for the full year. Macy's (M), which is in the middle of a sales recovery, said it expects comparable sales to rise 4.5% this quarter. Most other retailers said they expect July comparable sales to rise in the low-single-digit percentages.

Retailers could be playing it close to the vest, hoping to post upside surprises next month and "reawaken slumbering share prices," says Brian Sozzi, retail analyst at Wall Street Strategies. But he's one of several analysts noting that promotional activity was higher than expected in June, a sign that retailers are clearing out merchandise aggressively to make way for increased inventories for back-to-school and fall. And that's a sign that profit margins will be under pressure in the second half, as many have feared.

"Oh, yes, the inventory reduction story of 2009 will officially be over in the second half of the year, " Sozzi wrote in a report. "With that inventory investment and uncertain sales backdrop, the downside risk to earnings is tangible."

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