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Not So Fast: Retail Shares Fall Despite Rise in Comp-Store Sales

Retail sales finally blossomed in April, but scratch the surface and those impressive gains are only skin deep.

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Retail sales finally blossomed in April, but scratch the surface and those impressive gains are only skin deep.

Up against the easiest comparisons of the year so far and benefiting from both the early Easter shift and warmer weather, same-store sales posted the biggest monthly gains since November 2007.

But investors weren’t overwhelmed and remain cautious that an upturn is on the horizon for what has been a tough retail season so far. The S&P Retail Index fell 1.9 percent to 395.16, while the WWD Composite Index dropped 0.6 percent to 911.37. The Dow Jones Industrial Average was up 0.4 percent to 12,866.78 and the broader S&P 500 rose 0.4 percent to close at 1,397.68.

“If you look at March and April together, as we have been trained to do, results were not that impressive and really only mediocre,” said Eric Beder, retail analyst at Brean Murray, Carret & Co.

Combining March and April provides investors with a more accurate picture of comp trends given the calendar shift.

Same-store sales in April were also cosmetically altered by retailers who “bought” their numbers with increased promotions and markdowns, said Christine Chen, retail analyst at Needham & Co.

Despite April’s numbers and the presumed benefit of tax-rebate checks, both retailers and analysts predict it is still a bumpy road ahead.

“We are looking for modest improvement in May and June comp-store sales buoyed by rebate checks,” said Ken Perkins, research analyst at Retail Metrics Inc. “The impact of the stimulus will likely be muted somewhat by the continuous upward drumbeat of higher prices at both the [gas] pump and grocery stores.”

Upwardly revised earnings guidance by a number of companies will hopefully stem the free fall in first-quarter retail earnings estimates, he continued. A slew of major retailers report their first-quarter numbers next week, including Wal-Mart Stores Inc., Macy’s Inc., J.C. Penney Co. Inc. and Nordstrom Inc.

Across the board consumers were looking for bargains last month, making the discount sector the standout winner in terms of comps. Of the retailers tracked by WWD, the mass merchant sector posted an average gain of 7.1 percent, while the specialty sector increased 3.9 percent. The department store channel rose a modest 1.1 percent.

Looking at net sales for the month, specialty stores gained 13 percent, mass merchants grew 10.5 percent and department stores inched up 4.2 percent.

“The era of the ‘smart shopper,’ which we first saw in 2004, is now in full bloom this spring, as American households stretch their energy-strapped incomes at discounters and specialty stores that offer sharp values and newness,” said Craig Johnson, president of Customer Growth Partners, a private consulting firm.

Discount giant Wal-Mart Stores posted a 2.6 percent jump for the month, beating guidance of a 1 to 2 percent gain. This is the company’s largest monthly comp increase since March 2007.

Wal-Mart said it saw strength in the grocery, health and wellness and entertainment sectors. Apparel sales also continued to recover despite cold weather, with strengths in basics and consumables.

“The economy continues to get tougher and the ‘paycheck cycle’ is more pronounced for customers than in the past months,” Eduardo Castro-Wright, president and chief executive officer of Wal-Mart’s U.S. division, said. “As money gets tighter for them toward the end of the month, sales drop more than we have seen in the past.”

Wal-Mart expects May comp sales, excluding fuel, to be between flat and 2 percent.

Rival Target Corp. reported same-store sales up 3.1 percent, but these were below the company’s expectations. In its sales recording, the discounter said May comps are expected to be in the range of negative 1 to positive 1 percent.

Off-price retailers TJX Cos. Inc. and Ross Stores Inc. continue to benefit from consumers trading down to value-oriented merchandise, with each posting an 8 percent gain in April.

TJX increased first-quarter earnings guidance and now expects earnings in the range of 40 cents to 41 cents a diluted share. During the quarter, the company expects to benefit from a one-time tax-related adjustment. Ross Stores predicts first-quarter earnings in the range of 59 cents to 60 cents a diluted share, up from previous forecasts of 56 cents to 58 cents.

Roxanne Meyer, retail analyst at Oppenheimer & Co. Inc., said, “In the specialty sector, things were mixed. For the companies I cover, half beat expectations and half missed expectations. I would have thought less would have missed given the easier comparisons. I wouldn’t get overly excited about April’s numbers because the underlying fundamental trends haven’t seen much improvement.”

Teen retailers rebounded from a disappointing March, with American Eagle Outfitters Inc., Aéropostale Inc. and Abercrombie & Fitch Co. growing 2, 25 and 6 percent, respectively.

Aéropostale raised first-quarter guidance to about 25 cents a diluted share, up from a previous forecast of 20 cents to 22 cents a share.

American Eagle said results were buoyed by an improvement in store traffic, more seasonal weather and the arrival of new summer collections, but Chen said there were significantly more markdowns in the stores during the month. The teen retailer reiterated first-quarter guidance in the range of 18 cents to 20 cents a diluted share.

The Wet Seal Inc. reported a 1.9 percent decline, but beat consensus estimates and increased first-quarter guidance. The company now expects earnings in the range of 7 cents to 8 cents a diluted share, from previous guidance of 4 cents to 6 cents a share.

New York & Company Inc., Gymboree Corp. and Cato Corp. also boosted their earnings outlooks in their quarterly sales releases.

Gap Inc., which was flat for the month, was hurt by a 12 percent fall in same-store sales at its Old Navy chain.

Despite better control of costs and higher margins, “our traffic patterns and sales continue to be challenging…and the economic environment remains volatile,” said Sabrina Simmons, chief financial officer.

The specialty retailer expects first-quarter earnings in the range of 30 cents to 32 cents a share, and reaffirmed its full-year earnings outlook of $1.20 to $1.27 a share.

The department store channel continued to lag, as the sector remains highly promotional across the board, Chen said.

The biggest department store chain, Macy’s Inc., no longer reports comps, however, as of March.

While comps at Saks Inc. leaped 23.9 percent, the boost came from a more extensive Friends & Family event and the acceleration of a spring season clearance promotion. Management said that without these promotions, April comps would have increased by high single digits. The increased promotional activity will have a significantly negative impact on first-quarter margins.

Neiman Marcus Group Inc. reported a 1.9 percent decrease.

Kohl’s Corp. posted a 3.5 percent increase, beating consensus of 1.3 percent. The department store now expects first-quarter earnings to exceed its previous guidance of 40 cents to 42 cents a diluted share.

J.C. Penney said comps decreased 1.7 percent, but beat guidance of a 5.7 percent drop. Apparel and family footwear were the strongest categories, while the fine jewelry and home categories experienced weaker sales. The department store said it expects May comps to decrease in the midsingle-digit range. In a recorded message, management said tax-rebate checks will provide a modest, but short-lived, boost to sales. The company also said there is no clear indication the current weak economic conditions will improve, and as a result they are planning cautiously for the second half of the year.

Penney’s isn’t the only one. Retailers across the board have been aggressive in markdowns so far this spring and summer, eager to control costs and inventories given the weak economy. Analysts don’t expect that to change come fall.

“Going forward investors will be more interested in infrastructure — who has the best inventory control and cost-cutting initiatives — than who has the newest fashion,” Beder said.

APRIL SAME-STORE SALES
APRIL MARCH FEBRUARY
2008 2007 2008 2008
% Change % Change % Change
DEPARTMENT STORES
Bon-Ton -0.9 -15.8 -5.3 -7.2
Dillard’s -4.0 -14.0 -10.0 -2.0
Gottschalks -3.9 -0.8 -15.4 -9.5
Kohl’s 3.5 -10.5 -15.5 -3.8
Neiman Marcus -1.9 1.0 0.4 -7.3
Nordstrom -3.8 3.1 -9.1 -5.8
J.C. Penney -1.7 -0.6 -12.3 -6.7
Saks 23.9 11.7 -2.9 3.4
Stage Stores -1.0 -14.8 -10.3 -2.5
Average: 1.1 -4.5 -8.9 -4.6
 
SPECIALTY CHAINS
Abercrombie & Fitch 6.0 -15.0 -10.0 -2.0
Aeropostale 25.0 -14.0 2.5 7.0
American Eagle 2.0 -10.0 12.0 -4.0
American Apparel 27.0 NA NA NA
Banana Republic 0.0 -13.0 -8.0 -5.0
Bath & Body Works -8.0 -2.0 -13.0 -10.0
Buckle 34.0 1.8 20.9 24.3
Cache -1.0 2.0 0.0 4.0
Cato 5.0 -21.0 -9.0 3.0
The Children’s Place 15.0 -2.0 -3.0 5.0
Chico’s FAS -15.5 -7.3 -20.7 -14.9
Gap (U.S. stores) 0.0 -14.0 -14.0 -3.0
Hot Topic -2.5 -9.1 -3.5 -2.3
Mothers Work 2.3 -14.8 -6.0 4.8
Old Navy -12.0 -20.0 -27.0 -8.0
Pacific Sunwear 4.0 -16.5 -8.0 6.0
Rite Aid 0.5 2.1 2.6 2.2
Victoria’s Secret -4.0 -4.0 -6.0 -10.0
Walgreen 1.6 9.2 4.4 8.3
Wet Seal -1.9 -9.6 -10.8 -8.2
Zumiez 5.6 12.1 5.1 13.9
Average: 3.9 -7.7 -6.2 -0.3
 
MASS MERCHANTS
BJ’s Wholesale Club 17.8 1.2 6.0 5.9
Costco 7.0 6.0 7.0 7.0
Ross Stores 8.0 -7.0 -2.0 4.0
Stein Mart 3.2 -13.9 -17.1 -10.4
Target 3.1 -6.1 -4.4 0.5
TJX Cos. 8.0 -1.0 0.0 3.0
Wal-Mart (discount stores) 2.6 -4.6 0.9 2.5
Average: 7.1 -3.6 -1.4 1.8
 
Tally:
Up 21 10 8 16
Flat 2 0 2 0
Down 14 26 26 20
Total 37 36 36 36
 
SOURCE: COMPANY REPORTS
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