Consumers Rein In as Comp-Store Sales Disappoint in July

NEW YORK — July was a month laden with excuses, if not necessarily sales transactions.<br><br>Consumer skittishness about the stock market, coupled with lower clearance inventory levels, were among the alibis supplied by retail executives for the...

NEW YORK — July was a month laden with excuses, if not necessarily sales transactions.

This story first appeared in the August 9, 2002 issue of WWD.  Subscribe Today.

Consumer skittishness about the stock market, coupled with lower clearance inventory levels, were among the alibis supplied by retail executives for the minor meltdown in retail sales across the board in July. Overall comp increases were slightly more than half those projected.

Strong sales a year ago were among the secondary alibis for the paucity of increases as were a later return to school in Texas, the nonrecurrence of Florida’s tax-free shopping period from last year and the absence of federal tax rebates.Accordingly, the Standard & Poor’s Retail Index on Thursday fell 2.02 points, or 0.7 percent, to 207.35 even as the Dow Jones Industrial Average soared to its third consecutive triple-digit increase, gaining 255.87 points, or 3 percent, to close at 8,712.02. The retail index was as low as 257.35 during the day.Although low inventory levels were expected to limit top-line growth as retailers had less clearance merchandise to sell, second-quarter gross margins and earnings are likely to exceed depressed year-ago results. However, the outlook for the second half remains cloudy, with retailers building inventories as consumer confidence and spending appear to be eroding.During July, typically a summer clearance month that comprises roughly 20 percent of the quarter’s earnings, discounters supplied most of the gains that were there to be had, but even growth at Wal-Mart, Target and Kohl’s slowed. Department stores remained in crisis mode, as almost all reported negative results. Specialty chains were a mixed bag, as customer loyalties appear to be directed at product and price, and not to a specific store. Marcia Aaron, a specialty analyst with Pacific Growth Equities, noted that stores entered the second quarter with inventories 14.5 percent below year-ago levels, so they simply did not have the same level of clearance merchandise they typically sell in July.A handful of retailers — some of which landed on the short side of the comp break-even point, upped guidance for the second quarter, including Gap, Talbots and Abercrombie & Fitch. Wal-Mart, Ann Taylor and Pacific Sunwear finished ahead and guided earnings up as well.“It was a disappointing month to see the numbers down so broadly,” Russell Jones, a retail consultant at Cap Gemini Ernst & Young, said. “When Wal-Mart, Target and Kohl’s, the stars in the retail space, show declining monthly results and the laggards are definitely hurting, it must be a sign consumers are starting to pare back on some of their purchases and it could spell trouble for retailers.”Following June’s better-than-expected results, in spite of a continuous drumbeat of negative economic news, July’s disappointing performance gave retail observers reason to be cautious for the second half, especially as consumers curbed spending in July’s back half. Overall, the Goldman Sachs July comp-store index rose a lower-than-expected 1.4 percent, compared with the 2.4 percent gain in July 2001 and the 2.6 percent rise it originally forecast. Discount stores turned in a 4.3 percent comp increase, lower than the 5.1 percent rise in the year-ago period. Department and specialty stores continued to deliver troublesome results, down 3.4 percent and 3 percent, respectively. Last year, department stores were off 0.4 percent and specialty stores were off 4.2 percent.Among 50 retail firms tracked by WWD, only 17 posted comp increases, for a nearly 2-to-1 ratio of decliners versus gainers.“I am concerned about second-half margin and earnings results to the degree which retailers were overly optimistic about top-line expectations and rising inventory projections could post margin compression opportunities going forward,” said Todd Slater at Lazard Frères.Angie Selden, a managing partner of Accenture’s North American retail group, said retailers, faced with too much inventory and risky items in their assortment last year, began to cut back and hunker down as signs indicated last year’s holiday season would not be robust. That philosophy still prevails, leading to less stock and innovation and contributing to lackluster results.SPECIALTY STORESWith Gap division down 19 percent and Banana Republic off 6 percent, Gap Inc.’s 8 percent drop was below company expectations. However, Old Navy posted a 6 percent comp increase.Gap also said it expects to report second-quarter earnings per share of 4 to 5 cents, exceeding consensus estimates by 3 cents. Results are due Aug. 15. Heidi Kunz, chief financial officer, said Gap’s decrease was impacted by “inventory levels that were lower than expected entering July due to increased sales of clearance merchandise in June. We also experienced an unanticipated drop-off in traffic in the back half of the month which led to a monthly comp traffic decline of 16 percent versus 11 percent in June.” Men’s and women’s performed about the same. Limited Brands reported a 2 percent increase in comps, in line with expectations, while apparel comps rose 2 percent on 3 percent less inventory. Comps were ahead at Victoria’s Secret, 4 percent; Lerner New York, 7 percent, and Limited stores, 11 percent, but Express comps, slowed to “local” speed by weakness in men’s wear, and were down 2 percent.Pacific Sunwear of California had a 7.2 percent gain, comprised of a 7.6 percent rise at PacSun and a 3.2 percent gain at Demo. PacSun said all merchandise categories improved. Based upon July’s sales results, the firm now expects second-quarter EPS between 21 and 22 cents, exceeding earlier estimates of 18 cents. Women’s apparel retailers Ann Taylor Stores and Talbots Inc. both raised their earnings outlooks for the second quarter and Ann Taylor reported higher July sales. Ann Taylor outperformed estimates by reporting a 7.4 percent rise in same-store sales in July. Although Talbots’ comps fell 19 percent, the result was better than expected, as it posted strong sales of both regular-price and clearance merchandise. Ann Taylor raised its earnings estimate for the second quarter to about 38 cents a share from a previous range of 29 to 30 cents, while Talbots projected 31 to 33 cents, up from previous guidance of 30 cents.Abercrombie & Fitch’s 3 percent drop in comps reflected the combination of summer clearance and the initial selling of the back-to-school floor set. Men’s and women’s comps were similar for the month, with the improvement driven by shorts. Women’s comps continued to be strong in woven and knit shirts and skirts.Other specialty stores reporting negative July comps were American Eagle Outfitters, down 4.6 percent and 5.4 percent when including Bluenotes/Thriftys stores; Charming Shoppes, 3 percent, Eddie Bauer, 5 percent, and Wet Seal, 8.3 percent.DEPARTMENT STORESComparable-store sales at Federated Department Stores Inc. retreated 5.2 percent in July. James Zimmerman, chairman and chief executive officer, noted in a statement: “While business has been difficult all year, there was a significant deterioration in sales during the last two weeks of July, which we think was due in part to negative economic news in that period.” He also attributed the sales slide to comp inventories that ended the month 9.7 percent below a year ago. Improved gross margins, though, should help the firm’s second-quarter profits to “at least meet if not exceed the higher end of our original guidance of 50 to 60 cents a share.”The May Department Stores Co., parent of Lord & Taylor and Hecht’s, saw its comps drop 6.2 percent.Operators of major national chains also saw declines with comps at J.C. Penney Co. Inc. and Sears, Roebuck & Co. down 2.2 and 4.9 percent, respectively.Kohl’s Corp.’s hybrid discount-department store concept continued to outperform the industry with a 7.5 percent comp rally in July.Same-store sales at Dillard’s Inc. slid 3 percent. Women’s and junior’s were well above the company average with a 2 percent comp improvement. Accessories, shoes and lingerie comps slid 3 percent, while cosmetics and men’s apparel were down 6 and 7 percent, respectively.Saks Inc.’s total same-store sales slid 3.6 percent in July with a 3.1 percent drop at its department stores and a 4.3 percent decline at Saks Fifth Avenue.July comps for Neiman Marcus Group Inc. slid 4.2 percent. The specialty retail stores segment backtracked by 6.7 percent. Total comparable revenues for the fourth quarter shrank a milder 2.8 percent. Burton Tansky, president and chief executive officer, said the quarterly sales “reflected an improvement in our full-price selling offset by a reduction in off-pricing selling. The key to both of these trends was that we entered the fourth quarter with our inventory in excellent shape.”Nordstrom Inc.’s comps for the month inched up 1.9 percent with some help from its anniversary sale.MASS MERCHANTSTotal comparable-store sales at Wal-Mart Stores Inc. came in below plan in July with a 4.5 percent increase. The Bentonville, Ark.-based giant as recently as last week had been looking to come in at the low end of its estimates for a 5 to 7 percent uptick.A spokeswoman on a recorded call said, in addition to tougher comparisons from sales due to last year’s tax rebate, “good sell-through in summer merchandise this year in the Wal-Mart stores resulted in less clearance.”The flagship division posted a 5 percent comp increase, while the Sam’s Club unit inched up 1.9 percent during the month. Women’s apparel was included among the above-average categories in the Wal-Mart division, while the Northeast was the unit’s strongest region.Next week, Wal-Mart will report second-quarter profits that it expects will meet or exceed 44 to 45 cents a share versus 36 cents, after a 1 cent charge, in the year-ago period.Target Corp. also showed weakness, comping up only 1 percent in July. Same-store sales at its Target division were up 2.2 percent, below the 3 to 5 percent planned increase. Men’s apparel was among the weakest-performing merchandise categories for the month. Mervyn’s and Marshall Field’s comped down 5.9 and 4.9 percent, respectively. Ross Stores managed a comp increase of 4 percent in July.