Surprise In Store As Back-To-School Buys Lift

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Retailers earned a good report card from shoppers in August, with sales gains that handily beat forecasts Thursday as tempting deals and an improved economic picture prompted consumers to ratchet up spending for back to school.

August sales at stores open at least a year rose 5% vs. a year earlier, according to Ken Perkins, president of Retail Metrics.

The showing topped analysts' forecasts for a 4.2% gain.


Costco ( COST ),L Brands ( LB ),Cato ( CATO ),Zumiez ( ZUMZ ) andRite Aid ( RAD ) all beat views but a key retailer, Gap, missed. The overall solid results for August, combined with recent comments from retailers, bode well for this year's back-to-school season.

"Based on our store checks, it looks like the back-to-school season is shaping up to be a decent one," Perkins told IBD. "The month was a solid one, driven by back-to-school event shopping and improved consumer confidence that's reflective of an improved jobs picture."

Upbeat Outlooks

Perkins says retailers' back-to-school commentary generally has been positive, citing firms such as giant department store operatorMacy's (M), clothing retailerUrban Outfitters (URBN) and off-price retail operatorTJX Cos. (TJX) as among those that gave good initial reads on back to school when reporting their second-quarter results.

"That is important and indicative of it not being what it was last back to school, which was very difficult," Perkins said.

"With all the positive commentary around back to school, it's cause for some hope that the (retailers') third-quarter earnings and comps will show improvement from the second quarter," Perkins adds.

Perkins said consumers are still "event driven" in their shopping, and August same-store sales were fueled largely by back-to-school shopping.

Helping to lure back-to-school buying were aggressive promotions, says Perkins, with plenty of good deals in the offing.

Promotions were on par with last year, he adds, but retailers aren't hitting the panic button.

He says retailers' inventories are in better shape than they were last year. Retailers are carrying less inventory, resulting in their not having to run fire sales to get rid of excess inventory.

A brighter employment picture has led to improved consumer confidence, which also helped retailers during the month, adds Perkins.

Michael Niemira, consultant for the International Council of Shopping Centers, calculates a 4.8% gain in August same-store sales vs. a year earlier.

Niemira's tally includes nine retailers. Based on that, the August results reflect an "underlying pickup in consumer demand," which started in April, he said.

"This slice of reporting firms paints a picture of improvement in overall spending of about one percentage point from the same time last year," he added. "For me, it says the back-to-school performance was probably pretty good."

In the apparel space, Victoria's Secret parent L Brands saw a 5% increase in August same-store sales, sailing past estimates for a 2.8% gain.

Perkins says the apparel retailer's healthy showing is somewhat reflective of a strong 5% same-store sales increase in August at Victoria's Secret.

Gap Misses Mark

But top apparel retailerGap (GPS) fell short of views. It posted a 2% decline in August same-store sales vs. a year earlier after the close. That compares with estimates for a 1.7% rise. The miss sent its shares down in after-hours trading.

By company segment, Gap's Old Navy brand saw the best showing with a 2% rise in August same-store sales. But it fell short of views, says Perkins.

Still, Perkins says Old Navy is a good back-to-school destination.

It offers a "good value proposition to many moderate-income consumers," with low prices on jeans and other clothing for kids, Perkins noted.

He says action-sports retailer Zumiez is also well positioned for back to school. Zumiez posted a 2% rise in August same-store sales after the close vs. estimates for a 1.7% gain. It was its seventh straight monthly upside surprise.

Perkins calls Zumiez "very niche-oriented," with plenty of products you won't find in other stores.

Warehouse club powerhouse and typical top retail performer Costco Wholesale led the pack in August same-store sales -- up a hefty 7% vs. a year earlier, ahead of views for a 4.9% gain.

It had the most impressive showing of the month, Perkins says.

U.S. core same-store sales, excluding the negative impact from gasoline price deflation and the foreign exchange, rose 7% as well.

Perkins says that in August, Costco was a destination for electronic items as well as for back-to-college shopping.

Giant drugstore operatorWalgreen (WAG) saw a 3.7% gain in same-store sales for the month, missing views for a 4.4% increase.

Rival Rite Aid posted a 3.9% rise in August same-store sales, topping forecasts for a 3.3% increase.

Regional discount chainStein Mart (SMRT) posted a 2.5% increase in same-store sales for the month, short of views for a 3% gain.

Teen-apparel retailerBuckle (BKE) also missed forecasts, with a 0.8% increase in August same-store sales vs. estimates for a 1.1% gain.

Specialty apparel retailer Cato saw a 3% increase in same-store sales for the month, ahead of estimates for a 2% gain.

Niemira said the driver of August's healthy showing was a combination of the improvement in the labor markets, which is "continuing to make its way through the economy and through the spending channel."

Overall, Niemira says, the state of the consumer is much improved from earlier in the year and even a year ago.

The overall improvement in spending in August was in the nonauto and auto segments, he says.

"It's broad based," he added. "When you see broad improvement in spending trends, it tends to be driven by the economy."

Added Perkins: The August showing "offers a glimmer of hope to retailers that the consumer is turning the corner."

Economic Uncertainty

Perkins noted that two recurring themes among retailers in their earnings reports were a "challenging retail environment and an uncertain economic outlook."

Perkins says he agrees with the comments about the environment being challenging.

"It has been and will remain highly competitive and very promotional, which will continue to pressure margins," he said.

Niemira expects the overall back-to-school season, which runs from late July through mid September, to be the strongest since 2010.

He sees September same-store sales increasing 4% to 5% vs. a year earlier, driven by continued healthy apparel demand.

Electronics is another strong category for back to school, he says.

The back-to-school season is said to be a precursor to retailers' Christmas holiday season performance.

"The implication from the back-to-school season is positive for a good performance for the holiday season too," Niemira adds.



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 , LB , CATO , ZUMZ , RAD

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