Retailers report solid sales gains for July

August 4, 2011 - 10:59 AM
Retail Sales

In this May 18, 2011 photo, customers enter and exit a Sears store in Bethel Park, Pa. Retailers are reporting solid sales gains for July Thursday, Aug. 4, 2011, as deep discounts and sweltering heat drove shoppers to air conditioned malls. But with growing concerns about the economy, analysts worry shoppers heading back to malls for back-to-school shopping will hold tight to some of the habits of the Great Recession _ focusing on necessities and waiting for big discounts.(AP Photo/Gene J. Puskar)

NEW YORK (AP) — Many retailers posted solid sales during the kickoff to the back-to-school season as deep discounts and sweltering heat in July drove shoppers to air conditioned malls. But merchants worry that momentum won't continue throughout the remainder of the second-biggest shopping period of the year.

Despite a flow of bad economic news that kept consumer confidence shaky, a wide range of retailers that reported July sales on Thursday delivered results that beat Wall Street estimates, including discounter Target, department store Macy's. and luxury chain Saks. The International Council of Shopping Centers' preliminary tally of retailers' sales at stores open at least a year — a key indicator of a merchant's health — was up 4.6 percent, a slower pace than June's 6.9 percent gain but in line with forecasts.

While the numbers signal a strong start to the back-to-school shopping period, roughly between mid-July through September, there are concerns that shoppers will soon return to their habits of the Great Recession by focusing on necessities and waiting for ever bigger discounts. That could be a big problem for retailers, which are raising prices in order to offset with rising fuel, labor and other production costs.

"Early going, July looks like it's shaping up to be a solid month despite all the economic headwinds," said Ken Perkins, president of RetailMetrics LLC., a research firm. "But the concern is whether shoppers will buy back-to-school items at full price."

The concern stems from the fact that while the recession officially ended in June 2009, many shoppers, particularly in the low-to-middle income bracket, feel like it never ended. After all, the economic picture for most has not improved.

For many, wage gains haven't kept pace with higher household costs for food and gas, which is $1 more per gallon than a year ago. Home values remain depressed, and now companies, worried about the economy, are pulling back on hiring. Adding to that, this fall, shoppers will face higher price tags as retailers try to offset higher labor costs in China and prices of raw materials.

In this environment, retailers that cater to higher-income shoppers have fared the best. The biggest standouts have been luxury retailers like Saks Inc., which had a 15.6 percent increase for the month. That was much higher than the 8.5 percent forecast

Wholesale club operator Costco, which sells items in bulk, has also managed to attract higher income shoppers and others who like the treasure hunt experience of its stores. The company, which is based in Issaquah, Wash., said revenue from stores open at least a year climbed 10 percent in July. Analysts surveyed by Thomson Reuters predicted the figure would rise 8.6 percent for the warehouse club operator.

Those catering to the low- and middle-income shoppers have been hurt the most by the economic downturn. Still, many of those retailers posted sales gains during the month.

Target, which has been beefing up its grocery business, said revenue at stores opened at least a year rose 4.1 percent in July as shoppers picked up more groceries and health and beauty products. Target said shoppers spent more per transaction and it expects the key revenue measure to rise in the low- to mid-single digits in August. The company said back-to-school sales are off to "a solid start."

Many department stores also had respectable results, as they drew shoppers in with exclusive merchandise and sales on select items.

J.C. Penney Co.'s 3.3 percent beat the 2.3 percent estimate from Wall Street. And Macy's posted a 5 percent gain, which exceeded the 4.1 percent forecast.

Macy's, which also runs Bloomingdale's stores, benefited from growing online sales. But CEO Terry Lundgren also said that "fresh, interesting and distinctive merchandise," a "re-energized" culture, and better employee sales skills, also helped.

The hope among retailers is that the strong sales momentum will continue into August, with shoppers picking up a few fall items at full price while buying some summer bargains, too. But with rising worries about a faltering economy, shoppers may be more likely to wait to buy back-to-school items until they go on sale or they absolutely need them. Surveys from the National Retail Federation, Deloitte L.L.P. and other groups show that customers plan to buy only what the family needs, focus on fat discounts and reuse last year's items.

"It's going to be tough for retailers to succeed because of the economic uncertainty," said Stifel Nicolaus analyst Richard Jaffe.

The back-to-school season is important for retailers because it accounts for 16.1 percent of annual retailers' revenues, according to the International Council of Shopping Centers. It's also an opportunity for retailers to gain insight into consumers' shopping habits heading into the holiday shopping season that starts on the day after Thanksgiving.

Retailers will get a better sense of the back-to-school shopping season in August. So far, analysts and retail trade groups are sticking to their back-to-school growth forecasts, ranging from unchanged to 3 percent compared with a year ago. The National Retail Federation expects families to spend $603.63 on back-to-school items, from clothing to supplies, down slightly from last year's $606.40.

But not every retailer posted encouraging results during the beginning of the back-to-school season. Gap said it had a 5 percent drop in revenue at stores opened at least a year in July, worse than the 0.7 percent decline that analysts had expected. Its namesake division, Old Navy and Banana Republic as well as its overseas business, all posted drops. Still, the retailer offered a profit outlook that was above Wall Street estimates because of improvements in inventory.

Department-store chain Kohl's Corp. also posted disappointing results, with a 4.6 percent drop. That was well below the 3.4 percent gain that Wall Street analysts had expected. And teen retailer Aeropostale Inc., which had to discount more heavily than planned to get shoppers to buy, had a 14 percent drop in revenue at stores opened at least a year.

"We are very disappointed with our second-quarter financial results that were clearly unacceptable," said Thomas P. Johnson, chief executive officer at Aeropostale in a statement.