June discounts help retail sales, may hit July

NEW YORK Fri Jul 9, 2010 5:43am IST

A customer shops in the expanded baby department at a remodelled Sam's Club in Rogers, Arkansas, June 3, 2010. REUTERS/Sarah Conard

A customer shops in the expanded baby department at a remodelled Sam's Club in Rogers, Arkansas, June 3, 2010.

Credit: Reuters/Sarah Conard

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NEW YORK (Reuters) - U.S. retailers relied heavily on promotions to boost sales in June, helping teen clothing chains and department stores, but the trend may hit margins as they head into the key back-to-school shopping season.

Sales at stores open at least a year rose 3.1 percent for the month, just shy of the 3.2 percent increase that Wall Street predicted, according to reports from 28 retailers tracked by Thomson Reuters. That compared with a 4.9 percent drop a year ago.

"What it really says is we're just treading water," said Stephen Hoch, marketing professor at the University of Pennsylvania's Wharton School. "There's no evidence that somehow the consumer is going to step up to the plate and spend us out of the economic doldrums."

Teen apparel retailers like Abercrombie & Fitch and Hot Topic were among the best performers, along with department store chains such as Macy's Inc and JC Penney Co.

These companies had benefited from warmer weather and promotions for Memorial Day. Penney cited brisk sales of men's summer apparel ahead of Father's Day as well. Shares of Abercrombie surged 8 percent, while Penney gained 6.3 percent.

But weaker-than-expected results from companies like Gap Inc and discount chains like Target Corp highlighted concerns over profitability for the wider sector.

Gap same-store sales were flat, while analysts were expecting a 3.4 percent rise. This sets the company up for margin pressure this month as it tries to clear merchandise for the fall.

The Standard & Poor's Retail Index fell 0.9 percent, trailing the broader market. Gap shares tumbled 8 percent, while Target fell nearly 2 percent.

"A lot of players entered the quarter with too much inventory," Brean Murray analyst Eric Beder said. "They still have work to do to clear it out."

With consumers proving to be even more choosy about where they shop, the results show how well individual retailers are responding on product and pricing.

"You've got to wow somebody and really woo their money away from them," said Patty Edwards, founder of wealth management firm Storehouse Partners. She singled out Nordstrom, Zumiez and Aeropostale for successful efforts.

Lazard Capital's Todd Slater said Limited Brands' better-than-expected sales were the standout story of the month. He also praised Ross Stores and TJX for staying nimble on inventory.

BACK-TO-SCHOOL IN VIEW

June marks the 10th consecutive month of rising sales after a year of declines during the recession, but analysts have urged investors not to interpret the strength as a harbinger of better times while unemployment remains high and consumers stay cautious.

New data on Thursday showed a drop in U.S. unemployment claims, but that was not enough to boost retail shares.

The International Council of Shopping Centers said June sales came in at the low end of its outlook and forecast a same-store sales increase of 3 percent to 4 percent in July.

"Lower- and middle-income consumers have really taken a pause here," Retail Metrics President Ken Perkins said, adding that the jobless rate, stagnant home prices and declining stock markets still weigh on shoppers' minds.

Perkins said retailers were pushed to cut prices more than they had planned, with promotions getting heavier toward the end of the month.

"In terms of back-to-school, it suggests it's going to be a difficult one for retailers," Perkins said. "They are going to have to be a bit more promotional than they want to be."

Limited Brands, which operates retail chains Bath and Body Works and Victoria's Secret, said June same-store sales rose 6 percent, well ahead of the 3.2 percent gain analysts had expected. It forecast July same-store sales to be up in the mid-single digit percentages.

Top U.S. warehouse club operator Costco reported a 4 percent rise in June same-store sales, but fell slightly short of analyst forecasts as its stores were closed on Memorial Day.

(Reporting by Dhanya Skariachan; Additional reporting by Brad Dorfman, Ben Klayman, Helen Chernikoff, Shradhha Sharma, Viraj Nair, Emily Stephenson; Editing by Michele Gershberg, Derek Caney and Lisa Von Ahn)

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