Retailers: A Back-to-School Bounce

August sales for chains like Wal-Mart beat expectations, easing fears about consumer spending. But analysts aren't celebrating just yet

by Ben Steverman

Better-than-expected sales for major retailers in August sparked hopes that the big worries on Wall Street aren't troubling American consumers.

The biggest surprises among reports released Sept. 6 came from industry behemoth Wal-Mart (WMT) and teen apparel chains like Pacific Sunwear (PSUN) and American Eagle AEO. Extra back-to-school spending helped them beat expectations while other retailers, such as home furnishings and department stores, struggled.

Overall, August same-store sales rose 3.1%, vs. the 2.6% that analysts had forecast, according to research firm Retail Metrics.

Wal-Mart, with a stock that has been stagnant for years, turned in some of its best results in more than a year. Same-store sales rose 3.1% excluding fuel, more than double what analysts were expecting.

"The best same-store sales gain in quite some time reinforced our belief that Wal-Mart is in the early stage of a reawakening and major changes for the better," Oppenheimer (OPY) analyst Bernard Sosnick wrote Thursday.

Wal-Mart was "cutting prices aggressively" as part of a back-to-school campaign, says Ken Perkins, a research analyst at Research Metrics.

Also, advertising also seems to have done the trick for the world's largest retailer. A survey by Deutsche Bank (DB) showed a surprising 45% of consumers were aware of Wal-Mart's big back-to-school sales. "Wal-Mart's aggressive advertising campaign appears to be resonating with consumers," Deutsche Bank analysts wrote earlier in September.

Preparing for the new school year also sent mobs of teenagers to their favorite stores last month. Same-store sales rose 9% at American Eagle, 9.3% at Pacific Sunwear and 6% at Abercrombie & Fitch ANF. All major teen retailers beat expectations except for Aeropostale ARO, which saw sales rise 1.7% but still miss expectations.

The differences between teen retailers has a lot to do with the fashion and assortment of their products, says Holly Guthrie, senior retail analyst at Janney Montgomery Scott.

The retail results arrive as Wall Street is worried about a credit crunch that started with problems with subprime mortgages. Many worry housing and credit issues could spread to the broader economy, and even cause a recession if consumers slow spending.

Though the sales were better than expected, many retailers may have the calendar to thank. Texas and Florida started school later this year, and many states' sales tax holidays were also moved forward. Those factors pushed many back-to-school purchases from July into August. Guthrie says this explains both the disappointing July sales figures and the above average August figures.

"Overall, consumers are still spending," Guthrie says. However, sales growth has slowed from previous years, perhaps constrained by the poor gas prices, the housing market or other factors.

According to Retail Metrics, so far in 2007 same-store sales are up 2.8%, vs. 3.7% in 2006.

Not all retailers are faring as well as Wal-Mart and American Eagle, however.

The tough housing market has hurt sales at retailers who sell home furnishings or hardware.

Department stores have also suffered, Perkins says. As a group, department stores were up 0.5%, but still beat analysts' low expectations.

While Wall Street worries about the effect of mortgage and housing issues on low- and middle-income Americans, August's data show wealthy consumers kept shopping. Same-store sales at Saks (SKS) jumped 18.2%.

Amid the noise, it was hard for experts to identify trends from August sales. "It's really choppy right now," Perkins says. "It's hard to get a handle on where exactly [consumers] are."

Don't expect more good news next month. September sales will be released Oct. 11, but they will be compared to a good September of 2006, making it a tough year-over-year comparison, Perkins says.

Steverman is a reporter for BusinessWeek's Investing channel.