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The clouds over retailing darkened with June’s dismal comparable-store sales results, intensifying worries about the key back-to-school and fall seasons.
Unseasonably cool, stormy weather combined with persistent weak demand and doubts about the economy to produce deep reductions in most stores’ results. As unemployment and gas prices rose — and without the stimulus checks they carried last year — consumers reduced spending on discretionary purchases or eliminated it altogether. When they did buy, shoppers looked for promotions and value.
“June comps were largely disappointing, but not surprising, given the recent spate of negative macro data,” said Lazard Capital Markets analyst Todd Slater. “Winners were helped by ‘trade-down.’ TJX was the big winner.”
The results could put pressure on the b-t-s season, and second-quarter results, said Peter Brown, vice chairman of Kurt Salmon Associates, who added comps should see a lift in September and October as retailers measure volume against the anniversary of the meltdown of the finance and credit markets.
Stores should expect a consumer who shops later and hunts for bargains, Brown said, adding one way to offset huge inventory clearances before the b-t-s/fall season would be to offer “sharper-priced merchandise” with a value focus.
June comps reflected this trend, as consumers again headed to discounters and value-oriented retailers, such as Kohl’s Corp., which fell 5.6 percent, and J.C. Penney Co. Inc., down 8.2 percent, a better showing than the 9 to 12 percent drop the retailer projected.
Among the mass merchants, The TJX Cos. Inc. recorded the best results, with a gain of 4 percent, followed by BJ’s Wholesale Club Inc., which registered a 2.7 percent increase.
The “off-price model” is “well-positioned for the new consumer reality,” Slater said.
Costco Wholesale Corp. and Ross Stores Inc. both had a 1 percent rise in comps, while discounter Target Corp. posted a disappointing 6.2 percent dip.
“Target is very well run, but maybe Target is not the new thing anymore,” Brown said.
Following the Target model, department store rival Kohl’s has been launching “relevant, trend-right” brands, Brown said, which has “resonated with its consumer.”
Despite “the very weak performance that has persisted since December 2008, there were some signs of improvement beneath the surface with a handful of teen and value retailers posting surprisingly healthy gains,” said Michael Niemira, chief economist and director of research for the International Council of Shopping Centers. “These nascent signs of improvement are important since history suggests that consumer spending typically starts off sluggish prior to significant improvement.”
Department stores focusing on value and promotions also showed signs of improvement.
While Neiman Marcus Inc. posted a 23 percent comp slide, its New York-based upscale counterpart, Saks Inc., saw comps slide just 4.4 percent as it shifted a designer promotion into the month from May. Saks still estimates second-quarter comps will decline in the mid-teen range.
Stephen I. Sadove, chairman and chief executive officer of Saks, said combined sales results for May and June give a better picture of how the business is trending, rather than June alone.
“The shift in our designer event [from May into June] obviously significantly helped the comps in June,” he said. “If you looked at the May numbers, they were down in the mid-20s, so the combined May-June results, at minus 15 or so, is a much better indicator. That’s still better than the first quarter. We are certainly seeing better trends as you go into more of a promotional mode. Everyone [at Saks] has a very good attitude and the vendors are working with us. But I don’t kid myself. It’s still a tough retail environment.”
Nordstrom Inc. reported a negative 10 percent comp but improved on its 18.6 percent decline last June, partly because of a pricing strategy that included a price-matching policy and helped it navigate the difficult environment, Thomas Weisel Partners retail analyst Liz Dunn said.
Macy’s Inc. registered a same-store sales decline of 8.9 percent.
Wall Street took the anemic results in stride with the S&P Retail Index up 1.13, or 0.4 percent, to 311.47. The S&P 500 was also up 0.4 percent, to 882.68, while the Dow Jones Industrial Average eked out a 0.1 percent increase, finishing at 8,183.17. Despite the reduction in its comp decrease, Saks finished the day down 46 cents, or 9.7 percent, at $4.29.
Nordstrom was among the few retailers reporting a solid gain, rising 76 cents, or 4 percent, to $19.72.
Value resonated in the specialty sector as teen retailers Aéropostale Inc. and The Buckle Inc. reported two of the only gains of the month, rising 12 percent and 9.6 percent, respectively.
“I really see an evolution at Aéropostale,” Dunn said, adding the company has been able to retain its customer while developing its fashion content. The teen retailer upped its second-quarter earnings estimates 2 cents to a range of between 45 and 47 cents.
Rivals American Eagle Outfitters Inc. and Abercrombie & Fitch Co. struggled more with merchandising and pricing, registering declines of 11 percent and 32 percent, respectively.
Despite having new merchandise out on the floor, American Eagle saw some slowing in traffic toward the end of June when most retailers saw a pick-up in sales, Dunn said.
B-t-s floor sets at Abercrombie “looked good, but the prices are too high,” she added.
Dunn also noted that Abercrombie has deemphasized the presence of logos on its apparel, mirroring the consumer’s more “somber,” less flashy sentiment in light of the tough economy.
“This is not good for a brand like Abercrombie,” Dunn said, explaining consumers buy Abercrombie for its status.
Without the strong presence of logos, what would keep a consumer from buying a $24 dress at American Eagle rather than a similar $60 dress at Abercrombie, she said.
But Susquehanna Financial Group retail analyst Thomas Filandro disagreed, adding the shift in Abercrombie’s mind-set is in synch with that of the consumer.
Specialty retail giant Gap Inc., which posted a company-wide 10 percent comp decline, is also hoping to reinvigorate its customer by keeping inventory lean in preparation for the delivery of its new floor sets this fall, Filandro said.
“June is a transitional month for the Gap,” he said. “I think Old Navy is going to be their opportunity this year.”
By division, the Gap posted a 10 percent comp decline, followed by Old Navy, which registered a 7 percent dip. The more upscale Banana Republic had a 20 percent drop as the company struggled with marketing and too many big promotions.
“Banana has been lackluster to say the least,” Filandro said. “They have their backs to the wall.”
Elsewhere, Limited Brands Inc. said it had a 12 percent comp slide, as Victoria’s Secret and Bath & Body Works recorded decreases of 14 and 10 percent, respectively.
After the markets closed Wednesday, teen retailers, Hot Topic Inc. and Zumiez Inc. reported comp declines of 7.9 percent and 19.3 percent, respectively.
While Zumiez’s comps were expected, Hot Topic disappointed with a 7.2 percent drop at its namesake brand and a 10.3 percent decrease at Torrid, its plus-size chain. Flagging transactions caused the firm to lower its second-quarter outlook to a net loss of between 7 and 9 cents a share, down from a loss of 4 to 6 cents a share.
With the earlier-than-expected release of exclusive “New Moon” merchandise, and with Michael Jackson T-shirts set to hit stores next week, FBR Capital Markets analyst Adrienne Tennant believes Hot Topic could benefit.
Jennifer Black of Jennifer Black & Associates said extreme sports retailer Zumiez has felt the impact of the tough economy, especially on the West Coast. Unemployment in Oregon has hit 12.4 percent, the second highest in the nation after Michigan’s 14.1 percent, and joblessness in California is 11.5 percent. Nonetheless, “we believe Zumiez is a great small-growth story and feel, longer–term that this company still has ample opportunities for growth,” she said.
Looking across retail, Black said the summer months will be “tough,” with some pick-up in the fall, as kids start shopping closer to Labor Day.
But Kurt Salmon’s Brown had a starker outlook. “Even if the psychology of the consumer changes, there isn’t money to spend,” he said. “It’s very difficult to see a bright cloud right now. On the other hand, if you are in search of solitude this summer, just go to the malls.”