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June retail sales gain may be smallest in 3 years

NEW YORK (MarketWatch) -- With both consumer confidence and sentiment declining in June, shoppers' caution has translated to their wallets -- the month's retail sales are expected to rise at the smallest pace in about three years.

U.S. retailers will release their final results on Thursday.

June sales at stores open at least a year -- a key industry performance metric that strips out the impact of new and closed stores -- are expected to rise 0.5%, down from the 0.6% average estimate on Monday and the smallest pace since sales declined in August 2009, according to Thomson Reuters data.

Retailers are also facing the most difficult year-over-year comparison in five years, with the year-earlier's sales rising 6.7%.

As stock markets have declined in the past three months amid uncertainty about the euro-zone financial crisis, China's slowing economy, and disappointing job growth in the U.S., consumers paused in their spending even in the face of gasoline prices declining for 11 straight weeks.

As a sign of market jitters, retailers and brands including Bed, Bath & Beyond Inc. (BBBY) and Nike Inc. (NKE) last month issued disappointing outlooks while discounter Family Dollar Stores Inc. (FDO) said more of its customers were living paycheck to paycheck. See related story on Nike.

"June results are likely to further confirm slowing growth that surfaced in April," said BMO Capital Markets analyst Wayne Hood. "There's a growing list of management teams sounding more guarded as compared with previous months."

Meanwhile, tropical storm Debby in the Southeast and wind and thunder storms in the mid-Atlantic region that led to severe outages last week have also hurt demand.

A survey by the International Council of Shopping Centers and Goldman Sachs showed customer traffic slowed, with the highest percentage of consumers saying they didn't shop at all during the past week since late May.

Aggressive pricing

With uneven demand, retailers such as Gap Inc.'s (GPS) Old Navy and teen retailer Abercrombie & Fitch Co. (ANF) became more promotional heading into the end of the month, analysts said. By the last weekend of the month, slightly over 50% of retailers were giving more discounts and other promotions than last year, said UBS analyst Roxanne Meyer, adding on a bright note, many retailers will still have wider margins.

Retailers' promotional stance will likely continue as they begin to ship back-to-school and other goods to stores, analysts said. Wal-Mart Stores Inc. (WMT) , for instance, sharpened its price message in consumable items against regional supermarkets ahead of the Fourth of July holiday, BMO's Hood said.

"This is likely to extend into back-to-school items in July and August where early signs point to another aggressive pricing year," he noted. Back to school season is the industry's second-biggest selling after the holiday period.

For June, discounters are likely to be the best performers, posting a gain of 3.5%, Retail Metrics data showed. Drug-store chains and teen-apparel retailers are expected to fare worst and see declines.

The department-store group also is likely to be among the worst faring, with a gain of 1% expected. Consensus estimates for the segment have trended lower over the past week, led by downward revisions for mid-priced department-store operator Kohl's Corp. (KSS) , which is expected to post a 2.8% drop.

Kohl's rival, J.C. Penney Co. (JCP) , in the midst of pricing and merchandising changes that have alienated shoppers, is projected to have a 14% drop in the second quarter as it no longer reports monthly sales, Retail Metrics data indicated.

While upscale retailers Saks Inc. (SKS) , Nordstrom Inc. (JWN) and Macy's Inc. (M) may have fared better, their sales gains likely slowed as the June sentiment decline was led by those with higher household incomes. See related sentiment story.

"We are concerned that mid-tier chains will be able to drive sufficient transaction/unit growth to drive positive" same-store sales as price increases in the second half of last year roll off, said UBS analyst Michael Binetti. Sales "visibility is lower in the second half."

On the discount side, Costco Wholesale Corp. (COST) , which had posted gains in the high-single-digit rate for several years, will likely see sales slow to a 4% gain from a 14% increase a year earlier.

Target Corp. (TGT) is expected to post a 2.8% gain. Like other discounters, Target may have been hurt somewhat by the July 4 holiday falling on Wednesday instead of Monday last year. That means sales of holiday-related consumable items are posted for the month of July instead of June as the month closed on a Saturday, analysts said.

Gap Inc. (GPS) is expected to see a 0.3% increase, with gains at its namesake chain in the U.S. and at Banana Republic offset by declines at Old Navy, its largest chain, and its international unit. Victoria's Secret parent Limited Brands Inc. (LTD) is expected to post a 2.5% increase compared to a 12% jump a year earlier.

So-called off-price retailers TJX Cos. (TJX) and Ross Stores Inc. (ROST) , which sell name-brand products at a discount, will likely outperform again, posting gains of 3.6% and 4.5% each, according to Retail Metrics data.

"We continue to see evidence of strong traffic and market-share gains" at both companies, said MKM Partners analyst Patrick McKeever, though he added that their upside may be limited by lean inventories. "Off-price is still in a sweet spot."