By  on August 7, 2008

Retailers in July clearly felt the impact of the economic downturn, raising concerns over this month as stores get serious about back-to-school and fall selling.

Wal-Mart Stores Inc. set the tone, missing analysts’ estimates with a 3 percent same-store sales gain in its U.S. discount stores in July and tempering expectations for August with a projection of a 1 to 2 percent gain in the critical retail metric.

Even Wall Street caught the chill Thursday. With retail sales sluggish and crude oil rising on Thursday, the Dow Jones Industrial Average fell 224.64 points, or 1.9 percent, to 11,431.43, while the Standard & Poor’s Retail Index fell more sharply, contracting 2.1 percent to 359.70.

Since April, consumers, bearing the burden of higher fuel costs, have pocketed roughly $100 billion in tax rebate checks, but because the last checks were mailed out early last month, few believe retailers saw much benefit this period. “Stimulus checks have been fully refunded,” said Stifel Nicolaus retail analyst Richard Jaffe. “Rebate checks had no impact on July. It’s done, in my humble opinion.”

Others have a different view. According to Craig Johnson, president of Customer Growth Partners LLC, consumers have spent only 25 percent of the tax rebates, most of which went “straight out the door to pay for higher gasoline costs, which, for the three months of April to June, were also $22 billion higher than last year.”

The good news, Johnson predicted, is that what families have not spent will “provide a halo” over b-t-s season, the second-most-important selling period for retailers behind Christmas.

Citigroup analyst Kimberly Greenberger said that, with this month’s dropping oil prices, retailers may see dividends for b-t-s, but added that July comparable-store sales were a “discouraging sign.”

Piper Jaffray & Co. analyst Neely Tamminga said that, even though it may seem too early to tell how b-t-s will shape up, some retailers already have tightened up their expectations for the just-completed second quarter.

Both Abercrombie & Fitch Co. and Chico’s FAS Inc. lowered guidance for the period after reporting decreases in comps of 7 and 18.5 percent, respectively. However, in a demonstration of the value of stringent internal discipline, J.C. Penney, Gap and Hot Topic — with comps down 6.5, 2.1 and 11 percent, respectively — guided second-quarter estimates higher.

“From a Wall Street perspective, we are heading into back-to-school with some uncertainty,” Tamminga said. “We would expect you’re going to have several of these companies guide down the second half during their Q2 earnings cycles, which really kick off next week. If you are tied to back-to-school buying trends, you might actually wait before making that call.”

But, like last month, consumers are spending less on discretionary purchases such as clothing and more on staple merchandise. Mass merchants tracked by WWD averaged a 3.8 percent increase in comps in July, while specialty stores and department stores were down 1.5 and 4 percent, respectively. Of 37 companies tracked, only 14 had gains, 22 had declines and one — The Children’s Place — was flat.

“As a whole, discounters are still doing well,” said Michael Niemira, chief economist at the International Council of Shopping Centers. “It’s really a story that value and convenience are the driving forces behind retail demand right now.”

BJ’s Wholesale Club Inc. registered a 16.7 increase in July comps, including gasoline, which accounted for 9.7 percent, versus July 2007’s 1.5 percent gain. Costco Wholesale Corp. also did well, posting a 10 percent increase compared with a 6 percent gain a year ago.

Not all discounters were buoyant, though: Target Corp., which generally has struggled of late in the face of a revived Wal-Mart, reported a 1.2 decrease for July versus a 6.1 percent increase last year.

Department stores continued to have a tough time last month as seven out of the nine retailers tracked by WWD posted negative comps. Same-store sales slid 4 percent on average, with Kohl’s Corp. leading the list of decliners with a 10.4 percent decrease. However, Bon-Ton Stores and Dillard’s Inc. managed increases of 0.7 and 2 percent, respectively.

Higher-end players weren’t immune, either, raising further questions over the health of the luxury sector. Nordstrom Inc. reported a 6.1 decrease for the month, compared with a 9.4 percent gain last July, while Saks Inc.’s comps slid 5.3 percent, compared with a 14.9 percent gain last year. Neiman Marcus same-store sales were down 2 percent for the month.

Specialty store composite figures would have been worse if not for Buckle Inc.’s 20.9 percent increase in comps, 13.3 percentage points better than July 2007. American Apparel Inc. also did well, delivering a 14 percent gain, while Urban Outfitters Inc., which doesn’t report monthly comps, wowed analysts with a 13 percent jump in second-quarter comps.

But the long-struggling Gap Inc. posted an 11 percent decrease across the board, with brands Banana Republic, Gap North America and Old Navy reporting 8, 6 and 16 percent decreases, respectively.

Comps for teen retailer American Eagle Outfitters Inc. fell 7 percent, while rival Aéropostale Inc. charged ahead with a 13 percent jump.

Stifel Nicolaus’ Jaffe wasn’t alarmed by the July results. “July is a clearance month,” he said. “This is the time when people flush out all the spring and summer merchandise and reposition themselves for the fall season. So, for the best of times, you want to have an effective and timely clearance of merchandise where you preserve margins and set the stage for fall.”

In a tough economy, retailers are concerned with keeping inventories as lean as possible. “The good news is you preserve margin and live to fight another day,” he said. “The bad news is you might not have as many dollar sales as you did the prior year, but because they are low-quality sales, sales at a discount, sales at depressed margin, you don’t mind giving some of those up.”

Jaffe cited Kohl’s, which posted negative comps but had fairly good margins.

Analyst Jennifer Black of Jennifer Black & Associates, agreed: “It’s all about margin, and less about sales.”

Regardless, some companies understand how to control inventory better than others, and how to provide a new and exciting line at good price, Black said.

The teen market, which is gearing up for b-t-s, is one of the most competitive sectors right now, she said: “The teen line is struggling a little more than others. There is so much competition.”

Taking into consideration all the promotions across the board, Black said it was very difficult to distinguish one’s brand. Buckle, for instance, has done well because it has great brand strength and provides differentiated merchandise, she said.

“The product, not the price, continues to be the driving factor behind sales,” said Needham & Co. retail analyst Christine Chen. “We believe unique, quality, trend-right product is even more valuable to the consumer in this environment as shoppers make purchases on a ‘want it’ versus ‘need it’ basis.”

Going into this month, Chen anticipates better results as new fall products make their way into stores.

Piper Jaffray’s Tamminga agreed, and saw a silver lining. “The women’s apparel retailers, come second quarter, will be about 10 months into a contraction cycle on their margins,” she said. “And heading into the back half of this year, given much leaner inventories, better product and maybe a fashion-starved customer at this point, they might, counterintuitively in this environment, have an opportunity for upside relative expectations.”

Shoppers might get a renewed itch to shop, as well, but in the meantime, retailers will have to continue with their current strategies, according to Jaffe.

“You run your business more tightly, looking to turn inventories more quickly to generate more sales and more gross margin dollars on a smaller inventory assortment,” he said. “That would be the strategy all fall, but we’ve seen it play out this month, as well.”

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