Posted by: Ben Steverman on July 8, 2010
Many investors and analysts had expected discount retailers to do well last month. At a time when the U.S. economic recovery appears to be slowing, it makes sense that shoppers would be looking for bargains.
Apparently not. The most striking trend in June retail sales figures released today is by how much pricier department stores and luxury retailers beat expectations. Discounters, meanwhile, largely disappointed investors.
Bloomberg News reports:
Sales at Nordstrom [JWN], the U.S. department-store chain with more than 100 locations, jumped 14.1 percent at stores open at least a year, more than the 9.1 percent average estimate from Retail Metrics. Sales at J.C. Penney [JCP], the third-largest U.S. department store, climbed 4.5 percent, compared with a 3.7 percent projection. Macy’s [M], the No. 2 department store, rose 6.5 percent, also topping estimates.
Overall in June, same-store sales at department stores rose 5.9%, according to the International Council of Shopping Centers, and same-store sales rocketed 8.8% higher at luxury chains. Discount stores, meanwhile, saw sales rise 2%.
The Gap (GPS) demonstrates the trend, with different results at its chains aimed at high- and low-end consumers. Its pricier Banana Republic chain reported a 6% increase in same-store sales, just slightly below the 6.9% Wall Street was expecting, according to Retail Metrics. But discount chain Old Navy reported flat sales, even though analysts were expecting a 4.9% sales increase.
Compared to the rest of the retail universe, dollar stores continue to do pretty well serving the unemployed and others looking for deep discounts. Family Dollar Stores (FDO), which reported earnings on July 7, said same-store sales rose an estimated 5.5% in June. But, investors were clearly disappointed with the results and the chain’s outlook for the coming quarter. The stock fell 8.1% on July 7.
“The environment remains challenging for consumers,” Family Dollar chief financial officer Kenneth T. Smith told analysts. One problem for lower-end consumers cited by Family Dollar executives is uncertainty about the extension of benefits for the unemployed.
Another factor could be keeping a lid on lower-income spending: Rather than shopping, heavily indebted consumers are paying off credit cards and other debts. In data released July 8, credit to consumers fell $9.1 billion in May and $14.9 billion in April. Writes Ward McCarthy, chief financial economist at Jefferies Economics:
Consumers have been rebalancing balance sheets by paying down debt and increasing savings. As long as credit continues to contract at this pace, the prospects for a large increase in consumer spending are slim.
Many luxury consumers seem to be coming back to the malls without these constraints. As Bloomberg News notes, Tiffany & Co. (TIF) chief financial officer James Fernandez told an investment conference on June 30: “Our customers in the U.S. are feeling more confident than a year ago, tied to improved levels of net worth.”
While unemployment remains high, the economy is slowly improving. At a time like this, we may see an increasing split in attitudes between those who feel starved of cash (especially the unemployed and underemployed) and those who feel increasingly confident about their economic standing.