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Gas prices are on the rise.

Accelerating economic headwinds eased on Thursday with strong reports about retail sales and jobs, Wall Street’s best day of the year and even a pause in the escalation of oil prices.

This story first appeared in the March 4, 2011 issue of WWD.  Subscribe Today.


Retailers reporting comparable-store sales for February averaged increases of 4.2 percent, better than the 3.6 percent expected, according to Thomson Reuters, with men’s, women’s and children’s apparel and accessories generating some of the biggest gains among broadlines retailers ranging from Saks Inc., with an industry-leading comp gain of 15.3 percent, to Target Corp., up 1.8 percent with apparel up in the low- to midsingle digits.

While a strong sense of caution remains, particularly about the second half and impending increases in apparel prices brought on by higher costs for cotton and other commodities, there was cause for optimism on Thursday, and not just in the better-than-expected sales numbers.

New jobless claims last week fell to 368,000, their lowest level since May 2008, according to the Labor Department, fanning optimism about the employment report for February due today.

While gasoline prices continue to escalate at the pump, posing an immediate threat to the discretionary spending that drove February comp sales upward, the price of crude oil slipped back on Thursday from recent highs as Venezuela and the Arab League worked on proposals to end the standoff in Libya and its potential to disrupt global oil markets.

There were even indications that the price of cotton could stabilize after a long period of volatility. Cotton Incorporated economist Jon Devine said Thursday, in his organization’s first podcast, that preliminary estimates for the August crop season, while still early, are for “the largest cotton harvest ever recorded” worldwide, to 127.5 million bales, 6 million bales more than have ever been harvested.

Investors absorbed the upbeat news and sent the Dow Jones Industrial Average up 191.40 points, or 1.6 percent, to 12,258.20, for its best session since its 2.3 percent increase on Dec. 1. Retail stocks also locked in strong gains as the S&P Retail Index rose 5.87 points, or 1.2 percent, to 514.39, its best showing since a 1.5 percent leap on Feb. 8.

Some of the strongest retail stock showings of the day came from stores that exceeded analysts’ expectations. Hot Topic’s 1.4 percent decline was better than the 5 percent dip anticipated, and shares rose 5.5 percent to $5.57. Zumiez Inc.’s 12.8 percent spike was rewarded with a 5.5 percent increase in its shares, to $27.36, and Stein Mart Inc.’s 8.2 percent increase led to a 5.2 percent run-up in its shares, to $8.75. The Wet Seal Inc., up 7 percent for the month versus an estimate of a 1 percent decline, saw its shares rise 4.9 percent to $4.04.

Analysts were quick to point out that, while the February retail numbers were encouraging, they didn’t reflect the full effect of the recent rapid spike in gas prices, which this week lifted the national average to $3.39 a gallon.

Doug Hart, partner, Retail and Consumer Product Practice of financial services firm BDO USA, said the positive news for February is that “most chains reported a sales momentum that grew as the month went on. But one headwind to watch out for is gas prices, which hit consumers disproportionately. We saw that in 2007.

It didn’t kill retail sales during the period, but it put a damper on some sales.…Obviously, the rise in fuel costs will impact the mid- to lower end of the consumer base more than those at the high end.”

Laura Gurski, head of the retail practice at A.T. Kearney, observed, “We haven’t yet [seen] any inflationary increases in the numbers [since] gas prices spiked up recently.…Once consumers start to feel it in their pocketbooks, we’ll see a shift in the mix of retailers that perform well in the second half.”

 

According to David Bassuk, head of the global retail practice at AlixPartners, there’s generally a two-month lag from the rise in gas prices to the impact on consumers’ budgets. He’s also expressed concern about how higher soft goods prices will be received by consumers, beginning this spring but cresting during the second half of the year.

“This is a primary headwind ahead for us,” he said. “The average cost increases that retailers and brands face is north of 17 percent. There is no way they can pass that on to consumers.

“This is going to be painful for retailers. The rising costs will continue to swell when sales are at their height at the end of the year,” Bassuk said.

Having been through several years of a highly promotional climate, consumers might fail to bite.

“The consumer is trained to buy on a deal or promotion. In the last 12 months, there’s a new sense of confidence on the part of the consumer that a deal isn’t a deal until it’s 50 percent to 70 percent off. There are no signs the consumer is willing to accept increases in [apparel] costs when that’s added to the impact on rising fuel prices. Shopping sites such as Gilt Groupe and Groupon are changing the way consumers think and shop,” Bassuk said.

To survive possible turbulence, he concluded, retailers are “going to have to manage their inventory tightly [and] aggressively mark down goods to clear them out. You’re going to see a competitive environment in the fall. It will be survival of the fittest.”

Arnold Aronson, managing director of retail strategies at Kurt Salmon, said, “February saw a great conversion rate to spring goods and retailers showed they know how to come out of the recession and be profitable. However, [the headwinds] mean retailers have to stay very disciplined. They need to get as much sell-through as possible.”

He said he expects stores to adjust by tweaking their assortments: “You’ll be seeing a good/better/best story, with retailers concentrating on where they have naturally high gross margins,” he concluded.