October Retail Sales Ring Up Ahead Of Holiday Rivalry
Retailers bucked the head winds of a government shutdown and an uncertain economy in October, posting sales gains that topped forecasts in reports out Thursday.
The results reflect some resiliency on the part of consumers in a challenging environment -- an encouraging sign as retailers head into the holiday shopping season with promotions planned ahead of the traditional Black Friday sale discounts.
Sales at stores open at least a year rose 4% in October vs. a year earlier for those retailers reporting monthly comps, says Ken Perkins, president of Retail Metrics. Analysts had predicted a 3% gain. Factoring out results from drugstore chainsWalgreen ( WAG ) andRite Aid ( RAD ), retailers posted a 3.4% increase.
"It was a refreshing series of numbers that came out this morning with most retailers exceeding expectations, given the government had shut down and consumer confidence waned," Perkins said Thursday. "We finally got some cool weather in the back of the month that coincided with the opening of the government, which helped business for buy-now, wear-now apparel."
Michael Niemira, chief economist at the International Council of Shopping Centers, tallies a 4.1% gain in October comps for the retailers reporting monthly same-store sales that he tracks in his index.
"It's a return to being back on track for this group of retailers," he said. "This is encouraging. This year's holiday season has the potential to be a pleasant surprise for the industry, given today's reports showing how resilient the consumer can be as well as improving economic conditions."
Auld Lang Syne
The October results, combined with an improved economic environment, are "reinforcing our view that the holiday season will be modestly better" than last year, Niemira added.
He forecasts a 3.4% year-over-year gain in GAFO (general merchandise, apparel and accessories, furniture and other) sales for November-December. That would be a "tad" stronger than last year's 3% increase, he says.
Perkins concurs that the October same-store sales results are "somewhat encouraging." But he sees a "rather ho-hum, highly competitive holiday season."
"Any retailer that made any comment was very cautious on the fourth quarter and rightfully so," he added. "It whittles down to the fact that the labor market is chugging along at a modest growth pace, but not generating outsized job gains that are pushing up wages -- so income is stagnant for the vast majority of consumers. That is something that limits the overall spending pie."
Consumers had two factors in their favor last month -- a decline in gas prices and "very aggressive sales on the part of retailers," Perkins said. But overall, he adds, analysts were cautious in their estimates for the month.
"Given the sluggish economic growth we had been seeing, coupled with the government shutdown, the estimates were particularly low," Perkins said. "So the bar wasn't particularly high."
Even in a challenging retail environment, L Brands racked up an 8% gain in October comps vs. views for a 2.5% gain. The retailer also announced that it now expects third-quarter earnings to come in at the high end of its prior forecast of 23 cents to 28 cents per share.
Costco also came in with a solid 3% rise in total company October comps, ahead of forecasts for a 2.4% rise. Its core U.S. same-store sales -- excluding negative impacts from gas price deflation and foreign exchange -- were up 5%, above views for 4.4%.
Gap posted a 4% rise in October comps, sailing past views for a 0.6% gain.
In a struggling teen space, Buckle logged a 2.6% gain, well ahead of views for a 1.8% decline.
Action sports retailerZumiez (ZUMZ) saw a 1.2% increase in October comps, just shy of forecasts for a 1.4% rise.
Regional discounterStein Mart (SMRT) posted a 5.4% gain, beating estimates for a 2.2% increase.
Overall, consumers are still very "selective" about spending at retail, with their sights focused on "bargains," Niemira says.
"It's a more volatile retail environment," he said. "But consumers overall can be enticed into buying and they seem to be buying a bit more than they were three to six months ago."
Niemira expects November comps to rise 3.5% to 4.5%. He says the number could be "a lot stronger" given all the stores opening on Thanksgiving and adding more shopping hours, and the fact retailers saw "very weak" November comp performance a year ago.
Discount Days Ahead
Perkins says the holiday shopping season is likely to be "very competitive with margins at risk" as retailers use aggressive markdowns to drive sales.
Retailers will need to lure consumers with sales, he adds, unless they have a "niche product" and cater to the higher-end consumer considered less price-sensitive.
He sees high-end fashion houseMichael Kors Holdings (KORS), upscale jewelry retailerTiffany & Co. (TIF) and high-end department store operatorNordstrom (JWN) as among retail's best performers this holiday season. Off-price retail operators such asTJX Cos. (TJX) andRoss Stores (ROST) should also perform well, he adds, because they offer a "good value proposition."
Analysts forecast the industry's fourth-quarter profits to rise 4.5% vs. a year ago, Perkins says.
"That's OK," he said. "But it's certainly nothing to get excited about."
Niemira expects fourth-quarter comps for the retailers he tracks to rise 2% vs. a year earlier. That compares with a 1.3% gain in fourth-quarter comps for those retailers in 2012.
"The year-end will be better on the whole than a year ago," he adds. "It doesn't matter which metric you pick," Niemira said.