Retail stocks got a big bounce Thursday amid the broader market rally, even as March same-store sales showed major declines, most dramatically in the luxury sector.
But the sales decreases could have been a lot worse, and resulted in the cause-and-effect relationship between lower sales and declining share prices being turned inside out.
The S&P Retail Index jumped 14.41 points, or 4.6 percent, to 328.79, after rising 4.5 percent the previous day. The Dow Jones Industrial Average hit 8,000 and kept on going, ending the day at 8,083.38, up 246.27 points or 3.1 percent, following a strong profit preview from Wells Fargo & Co.
The same-store sales results represented a flight by consumers to value and away from conspicuous consumption as job losses during the recession reached a total of more than 5 million in March and the U.S. unemployment rate increased to 8.5 percent — the highest level in over 25 years — from 7.6 percent.
Although last month’s retail results were worse than the February figures, they were still better than anticipated. The late timing of Easter, which is Sunday, didn’t help the numbers, but it’s expected to benefit April. Building on that projection, investors went on a buying spree Thursday, betting retailers may be further along in their fight to regain sales momentum.
“The overall tone for March was actually stronger than the reported sales performance,” said Michael Niemira, chief economist and director of research at the International Council of Shopping Centers. “If we adjust for the calendar shifts, sales for March were stronger than reported.”
Matt Katz, managing director at AlixPartners LLC, a restructuring and advisory firm, pointed to discounters and off-pricers like The TJX Companies Inc. (up 2 percent) and Ross Stores Inc. (up 3 percent) and clubs like Costco Wholesale Corp. (4 percent) and BJ’s Wholesale Club Inc. (8 percent) to support the proposition that “if you have strong product at good value, you’re going to win the day. But there is definitely still a luxury consumer.”
However, he said, “Price point is in right now.” Katz acknowledged the “trade-up consumer is no longer there” and the upscale customer base is not what it had been.
That assessment was reflected in the luxury sector, which is reeling from reduced consumer spending. But that didn’t stop shares of Saks Inc. from rising 28.8 percent to $2.82 in the hours after the retailer reported a 23.6 percent drop in March same-store sales. (See related stock story.)
Privately held Neiman Marcus Inc. recorded the biggest declines in the high-end, a 31.2 percent drop. Nordstrom Inc. registered a 13.5 percent decline, lower than expectations as well as last month’s result. The retailer said results were “favorably affected” by a special event for its cardholders.
“We may be moving in the right direction, but this month looked a lot like February,” said Erin Armendinger, managing director of the Jay Baker Retailing Initiative at the Wharton School of the University of Pennsylvania. “Even if things are moderating, the further you get up the luxury chain, the worse it is.”
Armendinger said as the recession continues, the definition of luxury is changing. People do not want the “biggest” or “newest” merchandise right now, she said, adding, “ostentatious spending” is not “in vogue.”
Instead, consumers are starting to spend more on beauty and home products, which can be both “comforting” and “discreet,” she said.
None of the department stores reporting comps managed a gain, but results at two midtier retailers suggested the value proposition was resonating with consumers. J.C. Penney Co. Inc. and Kohl’s Corp. posted declines of 7.2 percent and 4.3 percent, respectively. Penney’s chairman and chief executive officer Myron E. “Mike” Ullman 3rd said home was the company’s best performing division in March, and fine jewelry was the weakest.
“The positive response we are receiving is most evident across our women’s assortments and increasingly in our home business,” he said, explaining that a “conservative approach” to inventory, coupled with new and affordable merchandise, will continue to be the company’s focus.
Macy’s Inc. was down 9.2 percent and Bon-Ton Stores Inc. off 11.2 percent. Dillard’s Inc. logged a 19 percent decline.
Wal-Mart Stores Inc., which has been a top performer during the downturn, fell short of analysts’ expectations of a 3.2 percent jump in comps. Excluding fuel sales, the discount giant reported a 0.6 percent rise in its U.S. stores, but said it expected first-quarter profits to be at the high end of its forecast of 72 to 77 cents a share.
The focus on producing compelling fashion at an attractive price is particularly important now, said Majestic Research’s soft-lines retail analyst Chandi Neubauer.
Neubauer pointed to Aéropostale Inc., with a 3 percent rise in comps, and American Eagle Outfitters Inc., which had a 16 percent dip, as retailers have integrated planned promotions with new product.
Both companies upped their first-quarter guidance, and said they were able to hold their margins in the face of a highly promotional environment, she said.
By stark contract, their higher-priced rival, Abercrombie & Fitch & Co., experienced a 34 percent comp drop, the worst result reported. The teen retailer saw comps fall 32 percent at its namesake unit, 35 percent at Hollister Co., 37 percent at its children’s concept, Abercrombie and 39 percent at Ruehl. The company has been plagued by stale fashion and advertising, Neubauer contended.
“They are stuck in the status quo,” she said. “I think it would be great for them to get some new blood in merchandising. Honestly, I don’t know what they’re going to do. They’ve already been very promotional.”
Lackluster product and marketing isn’t the problem, said Barclays Capital retail analyst Jeff Black, who views Abercrombie more as a seller of “basics with a little fashion twist.”
“The issue is really pricing and competitive positioning,” he said, calling the retailer’s fashion “consistent.”
In the specialty sector, teen retailers Zumiez Inc. and The Wet Seal Inc. struggled with declines of 17.9 percent and 11.4 percent, while rival The Buckle Inc. again shined with a 14.7 percent comp pick-up.
Mall-based Hot Topic Inc. raised its first-quarter guidance to a profit of between 1 and 2 cents a share, up from a loss of a penny to a gain of a penny, after it recorded a 7.1 percent comp gain.
At the Gap Inc., same-store sales were down 8 percent for the month, with declines of 14 percent, 16 percent and 5 percent at the retailer’s namesake, Banana Republic and in its international division, respectively. However, its most value-oriented brand, Old Navy, posted a flat comp, compared with a 27 percent dive last March.
Even though this was better than expected, Black said Old Navy will most likely post a double-digit decline next month because the company will be up against stronger numbers.
“I think we’ll be right where we started with Old Navy,” he said, adding Gap and Banana are also likely to see double-digit declines in April.
While Banana has a lot of inventory left to clear out, the Gap is “struggling with how to amplify its value message,” Black said.
Surveying the specialty landscape, Black said the “value story is just loud and clear.”
Majestic’s Neubauer agreed, observing if retailers have learned anything from March, it’s that innovation and price are king.
“I think the really big difference between the winners and losers is product and compelling prices,” she said. “In the end, making newness feel like it has a value doesn’t mean making it cheap.”