June comparable-store sales flexed some unexpected muscle, but the lift may be more of a short-term mirage created by economic stimulus checks and store promotions than revitalized consumers.
This story first appeared in the July 11, 2008 issue of WWD. Subscribe Today.
With the last of the government stimulus checks being mailed today, Wall Street was hardly sold on the idea of a turnaround as the Standard & Poor’s Retail Index slid 3.2 percent even as the Dow Jones Industrial Average rose 0.7 percent. The S&P 500 was up 0.7 percent.
July is the last month most analysts expect to see any help from government checks, and some predict that investors and shareholders, many of whom saw the stimulus as the best hope for a retail uptick, could begin to shy further away from apparel retailers.
Along with the checks and markdowns, comps may also have gotten a boost from warmer weather, Father’s Day and the inclusion of two first-of-the-month paycheck cycles.
“June is probably the month where a lot of people had the checks in hand,” said Deborah Weinswig, retail analyst at Citigroup. “There hasn’t been as much demand destruction in discretionary spending because you had the checks.”
Though the debate still rages about the effectiveness of the tax rebates, June comps suggest they had at least a short-term benefit.
“It’s hard to ignore that we had five disappointing months and then we have a positive blip here,” said Liz Pierce, retail analyst at Roth Capital Partners.
Analysts said the rebates were likely to have been used for value-driven purchases and the June comps tend to support that idea. Mass merchants and discounters continued to show positive comp-store sales, led by robust results from Wal-Mart Stores Inc., which included higher earnings expectations.
The world’s largest retailer logged a 5.8 percent increase in same-store sales, not including gas, at its U.S. Wal-Mart and Sam’s Club locations, leading it to raise second-quarter earnings estimates to a range of 82 to 84 cents a share. Costco Wholesale Corp. also saw a significant bump, logging a 9 percent comp rise, and BJ’s Wholesale Club Inc.’s increased 8.3 percent.
But investors stayed away from even the biggest gainers in the mass sector, which averaged a 4.2 percent gain as a whole. Shares of Wal-Mart fell 0.8 percent to $57.21 and Costco dropped 1.8 percent to $70.86.
To be sure, the market’s avoidance of the retail sector Thursday could be the product of larger economic trends continuing to take their toll on the average consumer’s discretionary dollar.
“Portfolio managers are looking at the sector and realizing it’s going to be a slow recovery,” said Marie Driscoll, apparel retail analyst with S&P Equity Research. “With the stocks down, portfolio managers are looking and seeing that people are still going to be struggling for another 12 months.”
With June in the rearview mirror, analysts said the battle for back-to-school business has begun and they’re keeping a close eye on whether the discounters will continue to generate positive sales results in apparel during a season not usually associated with that tier of distribution. The mass merchants will have their work cut out for them.
“The discounters aren’t traditionally thought of as back-to-school, so it’s not necessarily a home run,” Pierce said. “When it comes to back-to-school product, kids are particularly picky about what they put on their back. The specialty retailers are ready to take [the discounters] head on.”
The b-t-s season will prove especially important to retailers looking to offset recent slips in the missy category. Stores catering to the mom set have been especially hard hit by the weakened economic environment of rising prices, job cuts and tighter credit. Chico’s FAS Inc. reported a comps drop of 12.9 percent, while The Bon-Ton Stores Inc. included dress sales in the blame for its 6.5 percent slide.
“It’s almost as if women have stopped buying clothing,” said S&P Equity Research’s Driscoll. “Women manage the household funds and they realize what the costs are. Traditionally, the first place you saw a slowdown was in men’s but there’s been such a focus in men’s apparel in recent years.”
The official start to summer and its accompanying promotions gave specialty retailers momentum. Aéropostale Inc. reported a 12 percent jump in comps. The brand’s more value-conscious approach also helped to make it a winner, analysts said.
A solid assortment helped drive up comps by 16 percent at American Apparel Inc. and the Children’s Place Retail Stores Inc., which gained 16 percent. Retailers with lackluster sales earlier in the spring continued to struggle, such as American Eagle Outfitters Inc., which slid 11 percent in June, and Gap Inc., which saw a company-wide 7 percent fall.
“June is for the most part a clearance month, so there wasn’t much new assortment,” said Howard Tubin, retail analyst at RBC Capital Partners. “Clearance sales, I think, certainly got consumers into the store. We finally saw some warm spring and summer weather across the country and that helped.”
With the macroeconomic outlook still dreary, teen spending may be more promotion-driven than in recent years.
“The younger people are really attuned to the deals,” said Jennifer Black, president of research firm Jennifer Black & Associates.
The importance of promotional spending was perhaps best demonstrated by Nordstrom Inc., which pushed a women’s and children’s promotion traditionally held in June into May. The department store chain reported an 18.6 slide in comps last month compared with a 2 percent gain in June 2007. It also guided second-quarter earnings estimates down to at or below the low end of its previous range of 65 to 70 cents a share. Nordstrom shares declined 8.7 percent to close at $28.52.
Nordstrom was not alone. The clear loser in the June comp sweepstakes was the department store segment, which averaged a 4.3 percent decrease.
“The trickle-down theory suggests that some of their consumers could have gone down a level,” said Pierce of Roth Capital Partners. “Maybe they don’t want to put themselves in the position of being tempted, so they go to Wal-Mart or Target or Costco or the off-pricers. Consumers are looking for ways to stretch the dollar as far as it will go.”
Even without the Nordstrom slide, the luxury sector looked flat at best. Neiman Marcus Inc. reported a 2.4 percent comp slip, while Saks Inc. posted a 1.9 percent increase.
In comparison, mass merchants averaged a 4.2 rise in comps and specialty stores were mostly flat, registering an average 0.8 percent gain. Of the 38 retailers tracked by WWD, The Buckle Inc. was the leader with its 28.9 percent rise. Shares of the company still closed at $45, down 3.6 percent.
The off-pricers scored well, with The TJX Cos. Inc. up 5 percent on a same-store basis for the month and Ross Stores Inc. up 8 percent.
As always, the turn of the b-t-s season will also provide an opportunity for stores to offer customers a new assortment, something that might drive more sales be it men or women lining up at the register.
“Hopefully a fashion trend emerges,” said Brian Tunick, an analyst at J.P. Morgan. “People are talking about wide-leg denim; there’s still some skinny denim, but it’s the young men’s business that’s really driving apparel.”
Of course a weaker retail environment might be stunting the creativity that inspires such trends. Though some analysts said that mall traffic is positive, with a portion of the population opting for “stay-cations” this summer and in search of ways to kill time, June’s comps suggest that there aren’t any must-have items catching the eyes of consumers.
“Because of the macroeconomic conditions, no retailer is really ready to go out on a limb with the fashion, especially in the moderate range,” said Citigroup’s Weinswig.