Shop Talk
Retailers, consumers and prices
Frugal the fashion for back-to-school
By Nivedita Bhattacharjee
Once upon a time, back-to-school shopping lists included splurges like cool new mobile phones, the latest laptop computers and even PlayStation video game consoles. Not anymore.
September’s sales results were somewhat better than expected but showed that frugal is still in fashion in U.S. school yards. Not only were back-to-school purchases made a bit later, many were necessities plucked from discount racks.
So what IS selling? Woven shirts, fleece and knit pants drove sales at Abercrombie & Fitch. Zumiez saw good demand for its bundled promotions, while denims and sweaters drove sales at American Eagle Outfitters.
Abercrombie and Wet Seal both saw sales weaken after opening school bells rang – suggesting that this month’s numbers could be a one-off show of strength.
“Business became more challenging at Wet Seal after the second week of the month, once peak back-to-school business had passed,” Wet Seal CEO Ed Thomas said.
Check Out Line: Never-ending bowl of sales?
Check out what Americans like to eat. Apparently, it may be an endless bowl of pasta.
Olive Garden owner Darden Restaurants posted a weaker-than-expected increase in same-store sales in the most recent quarter.
But the 1.1 percent increase was better than what the restaurant industry has shown overall and sales at Olive Gardens open at least 16 months rose 2.7 percent.
Chief Executive Clarence Otis said Olive Garden saw increased traffic in July and August.
“We believe that the concept’s current Never-Ending Pasta Bowl promotion is helping keep the brand’s top-line momentum solid, and we look for same-store sales to show modest sequential acceleration in fiscal Q2,” Janney Capital Markets analyst Mark Kalinowski said in a research note.
Mmmmm!!!! Endless pasta!!!! Now if only we could get the company Longhorn Steakhouse to offer endless filets, we’d be all set.
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Check Out Line: Warning, slow recovery ahead
Check out signs that a slow recovery is in the offing.
Retail executives see only gray skies ahead as U.S. shoppers are still spending cautiously, giving weight to the notion that a recovery will remain weak beyond 2010.
“The economic backdrop is not optimal,” Ken Perkins, president of retail research firm Retail Metrics, told Reuters. “It’s not catastrophic like it was in 2008 and the first quarter of 2009, but it’s just very sluggish.”
Indeed, Wal-Mart Stores posted its fifth consecutive quarterly drop in U.S. same-store sales (sales at stores that were open for at least a year) and said that trend may not reverse itself in the current quarter, Home Depot cut its full-year sales view and Kohl’s, which caters to middle-income consumers, and BJ’s Wholesale cut their profit forecasts.
“The landscape hasn’t changed, and you can make the case that perhaps it has worsened,” Kohl’s Chief Executive Kevin Mansell told Reuters last week.
Consumer spending accounts for two-thirds of U.S. economic activity and was a key driver in the country’s rebound from its deepest recession since the Great Depression.
But with the housing sector, crucial to U.S. household wealth, still in a rut, and volatile stock markets pinching even those at the upper end of the income scale, the drivers of spending appear dangerously absent.
Check Out Line: How Lowe’s can you go?
Check out the weaker-than-expected earnings at Lowe’s.
Giving fuel to pessimists about the U.S. economy, Lowe’s, the No. 2 home improvement chain behind Home Depot, posted a quarterly profit and sales that missed analysts’ expectations, and also forecast lackluster earnings in the current quarter, underscoring “limited visibility into near-term demand.”
Sales at companies like Lowe’s had benefited immensely from the homeowner tax credit and cash for appliances programs, but now more and more uncertainty seems to be the watchword.
Last week, retailer J.C. Penney forecast a full-year profit below Wall Street’s expectations, stoking fears it would need further discounts to clear out inventory. That was a day after department stores Kohl’s and Nordstrom gave conservative profit outlooks.
“We are taking a relatively conservative approach to the economic climate and especially the moderate consumer,” Chief Executive Myron Ullman said.
U.S. retail sales rebounded in July but showed hints of lingering economic softness. However, investors can search for more clues this week with earnings from retail giant Wal-Mart Stores.
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Check Out Line: Consumers beware! Rising prices even at Wal-Mart
Check out rising prices even at Wal-Mart.
Pressures created by rising costs have caused even the world’s largest retailer, known for its ”rollback” discounts, to boost the prices that consumers pay for groceries. Wal-Mart Stores raised average prices on supermarket items by about 6 percent in a month, according to a recent J.P. Morgan study in Virginia that compared the prices of 31-item goods sold at its supercenters, and at supermarket rivals Kroger, Safeway, Harris Teeter and Whole Foods. Specifically, the study found that prices at a supercenter in Virginia rose 5.8 percent, the most significant sequential increase since JP Morgan started price comparisons in January 2009. While the world’s largest retailer remains the cheapest among supermarkets, rivals such as Kroger and Safeway are gaining ground, according to J.P. Morgan. Rising costs of raw materials and oil are pressuring companies to pass on costs to consumers with higher prices.
Indeed, clothes makers such as Nike, VF Corp and Hanesbrands are facing the same conundrum. And British baker Greggs said soaring wheat prices were set to push up costs, emphasizing a theme that may be repeated for such food makers as General Mills, Kellogg, Kraft and Sara Lee.
However, the timing is not good as the state of the U.S. economy is still uncertain and unemployment remains stubbornly high, leading many consumers to still be wary about spending. U.S. retailers in July posted weaker-than-expected sales despite increased discounting. Also in the basket:
Wendy’s/Arby’s to expand into Russia
Check Out Line: Frugality — Part Two?
Check out the apparent return of the frugalista.
Worries about stubbornly high U.S. unemployment and a tempermental economic recovery has shoppers reeling in spending on all but the essentials.
The 28 retailers tracked by Thomson Reuters reported an overall 2.9 percent rise in July sales at stores open at least one year, missing Wall Street forecasts of 3.1 percent. Seventeen of those retailers reported lower-than-expected sales, while nine — including Macy’s and Kohl’s — beat estimates.
“We are now in an environment where the dollars in consumers’ pockets are fewer, so the competition for those dollars has increased,” said Lawrence Creatura, portfolio manager at Federated Clover Investment Advisors.
U.S. consumer sentiment hit its lowest level in nine months in July on bleak prospects for jobs and income, according to Thomson Reuters/University of Michigan’s Surveys of Consumers. On Thursday, the government reported that new U.S. claims for unemployment benefits unexpectedly rose in the latest week.
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Check Out Line: Modest gains expected for U.S. retailers
Check out the modest gains expected for U.S. retailers in July.
U.S. retailers look set to report a small improvement in same-store sales for July as anxious consumers cut back on spending and big chains returned to discounting to lure them into stores.
Analysts are expecting same-store sales growth of 3.1 percent, compared with a decline of 5.1 percent last year, with department stores and discounters showing the biggest gains, according to Thomson Reuters.
July would be the 11th straight month of improving sales, but analysts warn beating last year’s weak results isn’t anything to crow about and new threats are on the horizon as consumer sentiment in July sagged to its lowest level since November.
“The consumer confidence numbers are hideous, and the promotions we’re seeing in the malls are pretty intense,” said Cowen & Co analyst Laura Champine.
Most retailers will report same-store sales on Thursday.
Meanwhile, in the consumer world, Procter & Gamble posted a weaker-than-expected quarterly profit as higher spending on marketing offset sales growth, while leather goods maker Coach reported better-than-expected earnings as demand picked up in North America and China.
Check Out Line: Restaurants offer earnings to digest
Check out the latest earnings on the menu from restaurant chains.
Panera Bread and P.F. Chang’s China Bistro have served up higher earnings, although Panera was slightly above expectations and P.F. Chang’s slightly below.
Panera, which sells bread, salads and sandwiches, said revenue rose but predicted lower-than-expected earnings for the current quarter.
P.F. Chang’s, which runs its namesake chain as well as Pei Wei, said higher menu prices helped boost the chain’s profits but analysts pointed to heavier promotions for the missed expectations. However, demand was better than Wall Street had expected at the Bistro restaurants and the company reaffirmed its outlook for the full-year profit.
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Check Out Line: One view on McDonald’s US sales
Check out a bullish view on McDonald’s June same-store sales.
Janney Montgomery Scott analyst Mark Kalinowski raised his forecast for U.S. same-store sales at the hamburger chain to an increase of 4.6 percent from an increase of 2.4 percent.
His revised forecast is based on his survey of 30 McDonald’s franchisees, representing 215 restaurants.
The survey also led Kalinowski to raise his July same-store sales forecast to a 4.4 percent increase from a 2 percent increase, Kalinowski said in a research note.
McDonald’s has been adding menu items likes coffee drinks, frappes and smoothies and promoting Angus burgers. The coffee drinks, especially, have helped the company perform better than other fast-food restaurants recently.
Kalinowski also noted that McDonald’s comparisons in the United States get easier later this year.
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Check Out Line: A decline in weekly sales numbers
Check out the decline in weekly U.S. same-store sales gains. After two consecutive weeks of strong positive weekly sales gains, retailers saw their sales take a breather with a 1.5 percent decline in the week ending July 10, according to the International Council of Shopping Centers and Goldman Sachs. Sales in the weeks ending July 3 and June 26 rose 1 percent and 2.1 percent, according to the report. On a year-over-year basis, sales also slowed to 3.2 percent, but continued to remain positive. “Sales showed a mixed performance over the past week as the seasonally-adjusted year-over-year pace continued to rise — although the unadjusted pace was much stronger due to the holiday-sales lift from a calendar shift when the Independence Day federal holiday was celebrated in 2010 and 2009,” ICSC chief economist Michael Niemira said in a statement. The ICSC reaffirmed its outlook for July U.S. same-store sales to increase in the range of 3 percent to 4 percent, compared with a 5 percent decline last year. However, U.S. retailers relied heavily on promotions to boost June sales, suggesting profit margins may suffer as they head into the key back-to-school shopping season. The Weekly Chain Store Sales Snapshot is produced by the ICSC and Goldman to measure U.S. same-store sales, excluding restaurant and vehicle demand, and represents about 75 retail chain stores. Meanwhile, Goldman analyst Michelle Tan said in a separate research note that there are few reasons to buy stocks in the apparel retail sector assuming a slow recovery. It cuts its 2010, 2011 and 2012 profit estimates by an average of 7 percent. “In a slow recovery with little sequential improvement in employment, sector sales have averaged less than 2 percent with flattish margins; this implies about 9 percent risk to Street forecasts,” Tan wrote. “History suggests downside risk to estimates in a double-dip scenario is roughly two times the upside in a robust recovery.”
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(Reuters photo)
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