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July Sales Show Surprising Strength

Retail made headway with comps for the month; the question is whether it continues for back-to-school.

Retail got some of its groove back in July — the question is whether retailers can keep the beat through the back-to-school season.

Sales last month were a pleasant surprise for many stores, who successfully cleared summer goods and reset for b-t-s against a backdrop of renewed economic worries, stubbornly high unemployment and continued turmoil in Europe.

The International Council of Shopping Centers said comparable-store sales for the month rose 4.6 percent — better than the 3 percent to 3.5 percent forecast last week. The results were an improvement over a soft June and were lifted by early b-t-s deals meant to lure in promotion-hungry shoppers.

RELATED STORY: Japanese Retailers’ July Comps Decline >>

“Like last month, July was up against strong figures,” said Arnold Aronson, managing director of retail strategies at Kurt Salmon. “July came up even more positively than June of this year. There aren’t too many retailers on the reporting list who couldn’t feel anything but encouraged.”

Aronson said retailers tightly managed inventories, expenses and promotions. “None of the promotions in July were knee-jerk—most, if not all, have been preplanned,” he said.

The sales results helped boost the S&P Retail Index 0.4 percent, or 2.30 points, to 614.62 on a down day for the market.

On the edges, though, there were signs of weakness that should spark caution. Both Abercrombie & Fitch Co. and Aéropostale Inc. issued profit warnings, Europe’s debt crisis and the weak euro have cut down on tourist dollars, and some high-end firms, such as Tiffany & Co. and Coach Inc., lost some of their luster recently. And only 21 fashion and related retailers report monthly comps — down from more than 50 in years past.

Even so, the comp reading was seen as a good sign.

RELATED STORY: July Comp Crux >>

“The performance was the strongest monthly gain since March,” said Michael Niemira, ICSC chief economist and vice president of research. “The improvement was somewhat uneven, as a shifting promotion pulled down the luxury sector performance, which had been the leading category in recent months.”

The luxury sector earned a 1.3 percent increase in comps, but that number will likely improve once promotions ramp up that segment in August.

Case in point: Nordstrom Inc. had a 0.9 percent gain for July, but the upscale retailer said its biggest event of the year — the Anniversary Sale — started one week later in July compared with last year, which shifted a week’s worth of sale volume into August. Historically, July is Nordstrom’s second-largest volume month, as a result of the Anniversary Sale.

Saks Inc.’s comps rose 3.5 percent after a 15.6 percent gain in July 2011.

The ICSC predicted that August comps would rise between 4 percent and 5 percent with b-t-s selling in full swing and the luxury sector expected to rebound.

Even if last month was driven primarily by clearance, some retailers gained some major ground, while others began to lose their grip.

The Gap Inc.’s namesake chain pulled one of the month’s biggest gains with a 13 percent comp increase. Plagued for years by what analysts have seen as an overabundance of “lackluster” merchandise, Gap seems to be turning a corner.

According to Richard Jaffe, Stifel Nicolaus analyst, “compelling promotions drove traffic to stores,” helped by the Gap’s “bright palette.”

The analyst pointed out that strong sales and improved product extended to sister chains Banana Republic and Old Navy, which registered increases of 8 percent and 12 percent, respectively.

Kohl’s Corp., which had been in a mini-slump after pulling three months of negative comps, dusted itself off and reported a 1.7 percent increase.

Macy’s Inc. continued its steady monthly sales trajectory with a 4.1 percent rise, in spite of the fact that its New York flagship in Herald Square is undergoing renovation. Some analysts surmised that both Macy’s and Kohl’s could be grabbing share from competitor J.C. Penney Co. Inc., which is in the process of overhauling its retail strategy. For Penney’s, the transformation has been rocky so far, with first-quarter comps falling 18.9 percent and the company tweaking its already trimmed down approach to promotions.

On Thursday, Fitch Ratings downgraded Penney’s credit rating two notches to “BB-minus” from “BB-plus.” The outlook on the rating is negative, and Fitch said the company’s sales are likely to “remain materially negative going into the critical back-to-school and holiday seasons.” Penney’s does not report monthly comps.

“The jury remains out on whether J.C. Penney has done some irrevocable damage or whether it can begin to turn around faltering sales and sustainably improve the profitability of its business once it gets through this transformational year and ‘rebases’ its revenue level,” Fitch said.

Also in the throes of a difficult period is the teen retail market. Although they no longer report monthly comps, Abercrombie & Fitch and Aéropostale both reduced their guidance recently.

On Wednesday, A&F cut its annual earnings per share outlook to a range of $2.50 and $2.75 from between $3.50 and $3.75, and said it was scaling back its European expansion as economic conditions there remain challenging. On Thursday, Aéropostale cut its second-quarter earnings outlook to breakeven on a per-share basis from the prior range of a profit between 3 to 5 cents. That news caused the teen retailer’s shares to take a 32.8 percent dive to $6.37. The retailer’s chief executive officer, Thomas Johnson, blamed the brand’s inconsistent fashion offering.

One retailer consistently offering compelling product and appealing prices is the Limited Brands Inc. The company’s Bath & Body Works and Victoria’s Secret continue to perform in the tough economy, with comp gains of 17 percent and 12 percent, respectively. “I really do think that marketing strategy makes a difference, especially when in difficult economic times,” offered Barbara Kahn, director of the Jay H. Baker Retailing Center at the Wharton School of the University of Pennsylvania.

Those who are doing best are succeeding with the help of strong marketing, she said, underscoring that the main goal is to steer consumers away from promotions.

“Consumers are trained to look for promotions,” said Tom Clarke, director in the Retail Practice at AlixPartners. “Product is the key to get consumers to buy. You need to show them you have a good value proposition — it’s still all about the product.”

While most analysts believe new product from b-t-s will give August a jolt and continue the momentum found in July, some wondered if the positive results are maintainable.

“The ones who are winning will likely maintain positive business results,” said Kurt Salmon’s Aronson. “The bigger question now is one of sustainability.”

And that is one very big question heading into the second-most-important retail season of the year.