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Retailers Top Chilly January Sales Views

By: Investor's Business Daily
Posted: 2/6/2014 6:30:00 PM
Referenced Stocks: COST;LB;WAG;RAD;GPS

Mother Nature wreaked havoc on retailers in January as frigid temperatures in much of the U.S. kept mall traffic weak and dampened spending, leading to sluggish sales reports for most chains Thursday even as they touted aggressive discounts.

But overall sales still came in ahead of the forecasts, led by a strong showing fromCostco Wholesale ( COST ) andL Brands ( LB ).

Sales at stores open at least a year rose 3.3% vs. a year earlier, according to Ken Perkins, president of Retail Metrics.

Analysts had predicted a modest 2.2% increase. "The month was not as bad as feared," said Perkins. "But it was still a sluggish month for most retailers."

Retailers faced a number of head winds in January.

"Retailers were very promotional for the month and mall traffic was very sluggish," said Perkins. "Weather was a major factor for many in the Midwest and Northeast."

The cold weather, he adds, led to a very "slow start" to the early spring selling season, with many consumers "cooped up" and not shopping.

Another head wind was "negligible" personal income gains for mid- and lower-income consumers, which kept a "lid on spending," Perkins said. Also, there was a "dearth" of fashion during the month.

Michael Niemira, chief economist for the International Council of Shopping Centers, also calculates January same-store sales rose 3.3% vs. a year earlier, which he calls a "moderate" showing.

Weather Dampens Demand

Overall, the month was "OK" and a repeat of December's showing of a 3.4% comps rise, he said.

"It's overwhelmingly a weather story on top of a low-volume month," said Niemira. "Therefore, I don't read too much into the numbers for the long haul. It certainly had an impact on the month and the quarter. But it doesn't mean there's a fundamental weakness."

As the months go by there's often a "bigger rebound from the exceedingly weak demand we're seeing because of the weather," he added. "We may have to wait until March, but as long as the economy continues to perform well, which is our expectation, I would tend to look beyond the weather."

There were some bright spots during the month. Upside surprises from warehouse club giant Costco, Victoria's Secret's parent L Brands, and drugstore chainsWalgreen ( WAG ) andRite Aid ( RAD ) accounted for much of the beat, Perkins says.

Also on the bright side, giant apparel retailerGap ( GPS ) posted January comps well ahead of views.

Costco came in with a solid 4% comp for the total company, ahead of forecasts for a 3.4% gain. Its U.S. same-store sales, excluding the negative impact of gasoline prices, climbed 5%.

L Brands posted a 9% rise in comps vs. a year earlier, sailing past forecasts for a 0.5% gain.

L Brands had to discount "quite a bit" during the month, as did most apparel retailers, said Perkins. But, he adds, it still came in with a strong comp gain even as it faced a tough comparison with last January's 9% increase in same-store sales.

"That's impressive, even though they had to take markdowns," said Perkins.

L Brands also raised Q4 earnings guidance, "something virtually no retailers have done this quarter," Perkins said.

Gap Guides Up

Gap posted a 1% increase in January same-store sales late Thursday, smashing views for a 1.1% decline.

Gap also announced Q4 earnings guidance in the range of 65 cents to 66 cents a share. That would represent full-year fiscal 2013 earnings growth in the mid- to high teens, on top of a 49% full-year earnings increase in fiscal 2012.

But outside of L Brands and Gap, the rest of the apparel-related space came in below views.

Even regional discounterStein Mart (SMRT), which had been a "pretty strong" performer of late, disappointed with a -0.7% decline vs. forecasts for a 1.3% gain, Perkins says.

In the struggling teen space, action sports retailerZumiez (ZUMZ) posted a 7.6% decline, missing views for a 3.3% drop.

Niemira says that based on the data out Thursday, consumer spending continues to be "very cautious." And the sales pace remained "uneven" by some of the major segments.

"Different retailers are performing well and some are struggling," Niemira said. "By and large it's a moderate kind of environment for sales gains. Until we get something that forces us to break out of that pattern we will get a moderate improvement in retail sales."

Now, he adds, it's a "market-share game, where those that are doing well are doing it at the expense of others." He sees February same-store sales increasing between 3% and 3.5%, depending on weather conditions.

What Will Spring Bring?

Perkins expects the spring selling season is going to be difficult for many retailers.

"Improved fashion should help," he said. "But slow economic growth and no wage growth will prevent many retailers from seeing significant sales gains. And this should result in a continued promotional environment for retailers with continued pressure on margins."

Wall Street is looking for Q4 earnings to fall 4.4%, which would be the worst performance since 2009, Perkins says. Q4 same-store sales growth is expected to rise just 0.5%.

But analysts see earnings for Q1, which typically runs from February through April, to be up 11.8% from a year earlier, says Perkins.

That's due in part to relatively easy comparisons with Q1 2013, says Perkins, when earnings were up only 4.5%.

Also, he adds, "there's a significant amount of optimism for a rebound" in earnings for department stores in particular, which saw a 44% drop in earnings growth in 2013.

Economic Outlook

Separately, the National Retail Federation released an upbeat 2014 economic forecast Thursday. The industry trade group forecasts retail industry sales (which exclude automobiles, gas stations, and restaurants) will increase 4.1%, up from the preliminary 3.7% growth seen in 2013. It also announced Thursday it expects online sales in 2014 to grow between 9% and 12%.

"Measured improvements in economic growth combined with positive expectations for continued consumer spending will put the retail industry in a relatively good place in 2014," said CEO Matthew Shay in a statement. "Though head winds in the form of the looming debt-ceiling debates, increased health care costs, and regulatory concerns still pose risks for both consumers and retailers, we are cautiously optimistic and hopeful that the economic tides will change in 2014."

The NRF predicts economic growth will be above its long-term historical average. Early estimates for real GDP growth could fall between 2.6% and 3%, "a noticeable improvement from the estimated 1.9% rate for 2013 and the fastest pace in the past three years."

It forecasts a continued modest recovery in the labor market, averaging approximately 185,000 jobs per month, helping decrease unemployment to near 6.5% or lower by the end of 2014.

The housing sector is expected to continue to improve in 2014, and stronger household and business confidence should spur more consumer spending overall.