Gloomy Days Ahead for Retailers

If sales weaken further after the stimulus checks are spent, a wave of bankruptcies may be forthcoming

Austin Cornelio

by Pallavi Gogoi

Congress probably wasn't thinking about food last winter when it voted to send stimulus checks to 130 million U.S. households. President George W. Bush and other leaders hoped the package, amounting to more than $100 billion, would grease the wheels for broad consumer spending, thus lessening the severity of housing's collapse. "The growth package has to be big enough to make a difference in an economy as large and dynamic as ours," Bush said.

As the checks got cashed and consumer prices surged, however, large numbers of Americans spent the money in May and June on such basic needs as food, utilities, and gasoline. Sales at nearly all retailers—save for those selling low-cost food—were dismal. And that's proving to be a source of deep worry for a broad array of retailers of everything from electronics and autos to home furnishings. "There are already too many building material suppliers than there are buyers, and auto dealers who have their parking lots full of SUVs they can't sell," says Brian Bethune, chief U.S. financial economist at Global Insight, a market analysis firm.

The bulk of the money, which started going out in May, has been disbursed, with the last checks already in the mail. Since May 1, the Treasury has pumped out $78 billion as tax rebates and transfers. But U.S. retail sales rose a mere 0.1% in June, after a 0.8% jump in May caused by the stimulus checks, according to the Commerce Dept. Specialty retail and department stores reported dismal sales: Limited Brands' (LTD) sales fell 9% in June and 6% in May, J.C. Penney's (JCP) fell 2.4% and 4.4%, while Abercrombie & Fitch's (ANF) sales declined 3% and 1%, respectively.

Produce in Particular

Yet at the level of staples, sales have been humming. Wal-Mart Stores (WMT) and warehouse clubs Costco (COST) and BJ's (BJ) have been among the prime beneficiaries. Wal-Mart reported a 6.1% sales increase in June, following a 4% gain in May. Costco posted increases of 9% and 7% in June and May, while BJ's Wholesale Club's sales surged 16.5% and 13.4%, respectively, mostly from perishable food and gasoline. "Overall, our food business continued to be strong," said Jeff Elliott, Costco's finance chief, on a July 10 conference call. "Our fresh foods category showed the strongest results in produce." No wonder that Family Dollar Stores (FDO) recently boosted its space for food at 2,700 of its 6,500 stores, which helped push up June sales 8%.

The unease among many retailers this summer is compounded by the fact that their own cost for goods and shipping is soaring with high gasoline prices. In the past six months, such chains as Ann Taylor (ANN) and Foot Locker (FL) have closed hundreds of stores. Further cuts could be forthcoming. "Specialty retailers who are already hurting will be in deeper trouble and will have to cut back on capacity, as consumers are being ultraconservative," Bethune predicts.