Brighter Jobs Picture Drives Solid June Retail Sales

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Retailers delivered robust sales gains in June, topping forecasts as a brighter jobs picture, savory deals and favorable weather prompted shoppers to hit the malls for light clothing and other seasonal goods.

But recent earnings guidance and comments from industry executives suggest the home goods sector is weakening and that headwinds persist as stores move toward the key back-to-school selling season.

Sales at stores open at least a year rose 5.5% from a year earlier, according to Ken Perkins, president of Retail Metrics. Retailers sailed past analysts' forecasts for a 4.9% gain. It was the fourth straight month retailers beat views.

Costco Wholesale ( COST ), activewear sellerZumiez ( ZUMZ ),Walgreen ( WAG ),Rite Aid ( RAD ) andStein Mart ( SMRT ) all turned out same-store sales that were above views.

"The monthly reporters turned in solid results for the month of June, fueled by an improved employment picture, heavy promotions and favorable weather conditions," said Perkins.

But he remains cautious: "It certainly doesn't signal that all is clear for retailers. We had a number of retailers over the last couple days raise red flags that the consumer still isn't feeling particularly strong. I don't think a 5.7% increase for monthly reporters suggests there is a strong rebound taking place in the retail space by any means."

Home Retailers Hit

One of those "red flags" came from hardwood floor giantLumber Liquidators Holdings (LL). In a second-quarter update on Wednesday, it guided earnings for the quarter "significantly lower" and reported a 7.1% decline in the quarter's same-store sales, which was a "significant miss," says Perkins.

The report didn't bode well for the home goods sector: "Our reduced customer traffic has coincided with certain weak macroeconomic trends related to residential remodeling, including existing home sales, which have generally been lower in 2014 than the corresponding periods in 2013," said CEO Robert Lynch in a press release. "We now believe the prolonged purchase cycle associated with our customers' discretionary, large-ticket home improvement projects is likely to be delayed for some customers into the fall flooring season, and for others, into spring of 2015."

Adds Perkins: "They're signaling the remodel and housing markets might not be as strong as many would hope. We knew in the spring the real estate market was slowing from a year ago."

Overall, same-store sales growth for the home sector retailers has slowed in the past couple of years and particularly in the past year, Perkins says.

For example, Lumber Liquidators saw a 14.9% pop in same-store sales in the second quarter of 2013, compared with the 7.1% decline in this year's second quarter.

Another example is home improvement giantHome Depot (HD). It saw a 10.7% rise in same-store sales in the 2013 second quarter. Analysts estimate it will show a 4% rise in this year's second quarter.

Why the slowdown in the sector? "Higher mortgage rates coupled with a growing (lack of affordability) for first-time home buyers are putting pressure on sales for these categories," said Perkins.

Home furnishing sales have been holding up OK, he says. Still, he says the slowing pattern in same-store sales growth is also occurring in this category. That includes top-performing luxury furniture retailerRestoration Hardware (RH) .

Analysts estimate that its second-quarter same-store sales will rise 14.8% from a year earlier, says Perkins. That would be slower than the 26% pop seen in the 2013 second quarter.

Perkins says the company's same-store sales growth has been "sequentially slower" in each quarter since same-store sales climbed 41% in last year's first quarter.

Recent lowered second-quarter outlooks from retailers such as Lumber Liquidators and farm and ranch store operatorTractor Supply (TSCO) combined with comments from industry executives "suggest retailers are facing continued headwinds as we move toward the back-to-school selling season," Perkins said.

But Michael Niemira, a consultant for the International Council of Shopping Centers, is upbeat on the back-to-school-season, which runs from late July to mid-September.

"I am most encouraged about back-to-school," he said. "The reason I am optimistic about back-to-school is the strength in same-store sales we've seen over the last three months as well as the improvement we've seen in the economy and the job market."

He projects total July-August-September sales of items such as electronics, family clothing, books and shoes, will rise 1.7% vs. a year earlier to $42.9 billion. That would compare with a 0.9% rise a year earlier.

Back-To-School Boost?

Niemira expects to see a lot of "strength" in back-to-school selling for the family clothing and shoe segments due to "increased demand triggered" by the improved economic conditions and labor market.

Most retailers reporting monthly fared well in June. Warehouse club and typical top retail performer Costco reported a solid 6% rise in June same-store sales, aided in part by higher fuel prices. It beat views for a 5% gain, says Perkins. Core U.S. same-store sales were also up 6%, topping forecasts for a 5.3% increase.

Giant drugstore operator Walgreen reported a 7.5% rise in June same-store sales on July 3, beating forecasts for a 6.8% increase. That same day rival Rite Aid posted a same-store sales increase of 3.9% in June, besting views for a 2.6% gain.

Action sports retailer Zumiez posted a 3.1% gain in June same-store sales late Wednesday, well ahead of views for a 2.3% gain.

Teen apparel retailerBuckle (BKE) saw a 0.7% increase in last month's same-store sales, besting views for a 0.5% decline.

Among the misses was Victoria's Secret's parentL Brands (LB), which saw a 2% rise in June same-store sales, below views for a 2.7% increase. It was its first negative same-store sales surprise this year.

Apparel giantGap (GPS) posted a 2% decline in June same-store sales from a year earlier, missing views for a 0.7% gain.

A slight miss came from regional discount chainStein Mart ( SMRT ). It saw a 2.6% rise in last month's same-store sales, which were slightly below a projected 2.7% gain.

Membership shopping warehouse club operator in Latin America and the CaribbeanPriceSmart (PSMT) saw a 1% rise in June same-store sales, less than views for a 4.5% gain.

While the overall performance for June was "healthy, there continues to be a dichotomy between staples and discretionary spending," Niemira wrote in a report.

"Discretionary spending may be improving for the upper-end consumer," he said. "But the mid- to lower-end consumer is still very cautious on discretionary spending."

Perkins adds that those consumers, who have discretionary income to spend, are trending toward buying more "experiential" types of purchases such as travel and entertainment. Big-ticket items such as cars are also faring well.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: COST , ZUMZ , WAG , RAD , SMRT

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