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July sales upside may bode well for back to school

NEW YORK (MarketWatch) -- Against the shadow of macroeconomic concerns, consumers delivered better-than-expected July sales to U.S. retailers, showing that they still have spending power when given the right incentives.

Industrywide, July same-store sales in an index of 20 retailers rose 4.3%, nearly triple the 1.5% consensus analyst estimate, Thomson Reuters data showed. More than three-quarters of chains exceeded expectations. Read "July's mixed blessing for retailers."

Teen retailers were the one weak point and the only segment that posted a decline. Shares of Aeropostale Inc. and Abercrombie & Fitch Co., both of which no longer report monthly sales figures, tumbled 34% and 15% each after the companies' sales dropped and profit forecasts fell far short of expectations.

One of the biggest upside surprises came from the largest U.S. clothing chain, Gap Inc. (GPS) Sales at the San Francisco parent of Old Navy and Banana Republic rose 10%, more than double the 3.8% analysts were looking for.

Gap North America sales surged 13%, beating the 6.4% estimate and marked their sixth straight monthly increase. Its other divisions also posted positive surprises. The company forecast second-quarter profit of 47 cents to 48 cents a share, beating the 38-cent average estimate in a FactSet poll. Gap shares surged 10%.

Gap has been able to excite shoppers with on-trend fashions such as colored denim, analysts said.

"Compelling merchandise and effective promotions across all divisions helped to drive strong traffic and lift sales," said Stifel, Nicolaus & Co. analyst Richard Jaffe, adding results bode well for solid back-to-school sales at both Gap and Old Navy.

Good portent for back to school

While July is the smallest month of retailers' fiscal second quarter (about 30% of the quarter's sales) and mostly a clearance-driven period, the mostly better-than-expected results bode well for back-to-school, the industry's second-biggest selling period after the Christmas holiday, analysts said. In June, retailers posted their worst results in three years. See June sales story.

"We are far more encouraged about [back-to-school] than we were coming out of June," said Ken Perkins of Retail Metrics.

"We still think it's going to be very competitive and highly promotional, but the strength in July suggests consumers may follow through" after surveys suggested shoppers would spend as much as or more than they did last year.

For instance, Stage Stores Inc. (SSI) , the Houston-based regional department-store chain located in small and mid-sized towns, said it feels good about its merchandise and marketing plan as it enters the back-to-school season. Its comparable sales rose 5.3%, more than double the analysts' consensus.

Mid-tier department store chain Kohl's Corp. (KSS) , which posted a surprise gain, said it has "the appropriate mix of basics and fashions" for back to school.

On a national scale, discounter Target Corp. (TGT) sales rose 3.1%, beating the 2.7% estimate. Target Market PulseCostco Wholesale Corp. (COST) sales, which released its results on Wednesday, rose a better-than-expected 5%. Costco sales report.

"Guests continue to respond to our innovative merchandising, remodel program and 5% [discount given on Target cards], driving healthy increases in traffic and sales in a consumer environment that remains quite challenging." said Target Chief Executive Gregg Steinhafel.

Victoria's Secret parent Limited Brands Inc. (LTD) continued to outpace with sales jumping 12%. It raised its profit outlook to as much as 48 cents a share from a prior estimate of 45 cents and declared a special dividend of $1 a share.

"Companies with compelling and differentiated assortments are thriving," said UBS analyst Roxanne Meyer.

For both TJX Cos. (TJX) and Ross Stores Inc., (ROST) which have thrived through a model of selling discounted designer and other brand-name goods, sales were up a better-than-expected 7%. They both raised their second-quarter outlooks.

The results speak "to our on-point fashions and brands at great values and wide customer demographic appeal," said TJX Chief Executive Carol Meyrowitz, adding traffic was up "substantially" at all divisions from T.J. Maxx to Marshalls.

Surprises

Macy's Inc. (M) sales rose 4.1%, beating the 3.2% estimate.

Nordstrom Inc. (JWN) sales also posted a surprise increase, defying concerns that sales would be hurt by a shift in the timing of its anniversary sale.

Saks Inc., (SKS) on the other hand, missed expectations even after it gave away gift cards with purchases.

"We sensed optimism related to [back-to-school] in our conversations with the companies," said UBS analyst Michael Binetti, referring to his department-store coverage universe. "Macy's is poised to reaccelerate sales when the consumer has a clear 'call to action' to shop."

He said he's cautious on his outlook for Saks because of its high exposure to New York, where declining European tourist spending has hurt retailers including Tiffany & Co. (TIF) .

Abercrombie's negative surprise

With July being the hottest in more than 21 years, shoppers flocked to the comfort of air-conditioned malls and helped retailers clear out excess summer merchandise, analysts said. Still, they cautioned that better sales may come at a cost to profitability and warned a better gauge of underlying back-to-school demand will take place in August instead.

For July, consumer confidence picked up after four straight months of declines. Several back-to-school surveys have forecast a pickup in spending. For instance, a National Retail Federation poll showed average spending is likely to rise at its fastest pace in at least 10 years.

But several teen retailers don't look to be the winners of back to school business. Abercrombie (ANF) late Wednesday reported that second-quarter same-store sales dropped 10%, reflecting declines of 5% in the U.S. and 26% overseas. A&F Market Pulse.

The company also slashed its full-year outlook by a dollar and forecast second-quarter earnings of 15 cents to 18 cents a share, missing the 25-cent analyst estimate. Abercrombie, which has been hurt by the debt crisis in Europe, also is slowing its new international Hollister and namesake chain's flagship openings.

"Macroeconomic conditions remained very challenging during the quarter, particularly in Europe but also increasingly in the U.S.," said Abercrombie & Fitch Chief Executive Mike Jeffries.

Winners and losers in the teen sector

At A&F's lower-priced rival, Aeropostale Inc., (ARO) second-quarter sales unexpectedly fell 1%. Aeropostale, which blamed disappointing store traffic, said it would break even for the quarter, compared with its prior estimate of profit of 3 cents to 5 cents a share.

American Eagle Outfitters Inc. (AEO) on the other hand, raised its forecast after second-quarter sales rose a better-than-expected 9%.

Abercrombie "is being left behind by competitors like (American Eagle and Aeropostale) who are placing a significant bet on the shift in consumer tastes toward a more fashion focus as opposed to the typical basics offering," said J.P. Morgan analyst Brian Tunick.

Music- and movie-inspired teen retailer Hot Topic Inc., (HOTT) on the other hand, said July sales were up 3.9%, slightly exceeding estimates. The company forecast a narrower second-quarter loss than it previously expected. However, a disappointing third-quarter outlook sent its stock down 12%. Hot Topic details.

At action-sports retailer Zumiez Inc., (ZUMZ) sales rose 7.5% but missed estimates of an 8.5% gain.

Wet Seal Inc. (WTSLA) sales slumped 16%, missing estimates. The company said it's hurt by a past decision to raise prices and move from its model to offer fashions frequently. The retailer, which fired its former CEO Susan McGalla recently, also said Its board is "conducting a thorough capital-planning review."

The return to the lower-priced and trend-driven model, a huge success before, "should please its core customer base," said Brean Murray Carret & Co. analyst Eric Beder.