Some Retailers Seeing Sales Growth

Second-quarter profits for the retailers have been coming in better than expected, mirroring a trend I've seen with other industries. Nearly 75% of the retailers have topped expectations.*

Though the numbers are better than forecast, they need to be taken in context with the economic backdrop. Most retailers failed to achieve growth, either in terms of same-store sales or profits. The third-quarter could remain challenging, given the consumer confidence numbers. The Conference Board's index of consumer confidence stands at just 54.1. Though an improvement from July, it is still a weak reading.

Some Retailers Delivering Real Growth

Not all retailers are struggling, however. In fact, just last week, 2 retailers reported both sales and earnings growth.

Aeropostale (ARO - Snapshot Report) achieved an impressive 12% increase in same-store sales, which helped lead to a 20% increase in total sales. Earnings of 57 cents per share were a penny above expectations, and compare to 31 cents per share last year. Tops sold particularly well. President Mindy Meads noted on the conference call that "frankly our customer cannot get enough of our names." She observed that just about anything bearing her company's name, whether it be "a T-shirt, a polo or candy," is selling well.

The teen apparel retailer guided for third-quarter earnings of 76 to 78 cents per share, slightly above the average forecast. Though full-year projections were not provided, nearly all of the covering analysts raised their forecasts. The revisions pushed the Zacks Consensus Estimate 7 cents higher to $3.01 per share.

Ross Stores (ROSS) said total sales rose 8%, driven by a 3% increase in same-store sales. Profits totaled 82 cents per share, versus 54 cents last year. The off-price retailer saw good demand for dresses and shoes.

The company raised its full-year earnings guidance to between $3.00 and $3.12 per share; previously, the company had forecast profits of $2.62 to $2.72 per share. Revisions by nearly all of the covering analysts pushed the Zacks Consensus Estimate 28 cents higher to $3.10 per share.

In both cases, gross margins were aided by effective inventory management. Though sales were good, it is notable that neither company had to sacrifice pricing to bring customers in.

I would be remiss if I did not mention Dollar Tree, Inc. (DLTR - Snapshot Report). This morning, the company reported second-quarter sales of $1.22 billion, an 11.9% increase. Same-store sales rose 6.8%.

The company's profit of 63 cents of per share was well above both the Zacks Consensus Estimate and year-prior results. Not only did the higher sales help, but DLTR also expanded its gross margin by 130 basis points.

Dollar Tree raised its full-year earnings guidance to $3.10 and $3.25 per share. The Zacks Consensus currently calls for $3.02 per share, and is likely to be revised higher over the next several days.

Others Achieving Growth By Expansion

Though ARO and ROST delivered same-store sales growth, the majority of retailers were unable to do so. There were some, however, that were able to offset the decline in same-stores sales with growth elsewhere. Two examples are Dick's Sporting Goods (DKS - Snapshot Report) and Kohl's (KSS - Analyst Report).

DKS grew net sales by 3.7% thanks to new stores and the addition of e-commerce sales. Same-store sale lagged, however, falling 4.1%. Golf Galaxy sales were particularly weak. Non-GAAP profits were down slightly at 36 cents per share. The drop was a result of lower margins, reflecting clearance activity at Golf Galaxy and pricing promotions at Dick's Sporting Goods stores.

The company's guidance was better than analysts had projected, however. DKS anticipates non-GAAP profits to total between $1.02 and $1.07 per share. Revisions by the majority of the covering analysts have resulted in a new Zacks Consensus Estimate of $1.06 per share.

Kohl's operated 65 more stores at the end of the second-quarter than it did a year prior. These new stores helped the company to generate a 1.3% increase in net sales, despite a 3.2% drop in same-store sales. Second-quarter profits were down slightly, however, at 75 cents per share, because of higher operating expenses.

Nonetheless, brokerage analysts are more optimistic about the remainder of the year. Their revisions have resulted in a full-year Zacks Consensus Estimate of $2.76 per share, 15 cents higher than the average profit forecast of a few weeks ago.

Zacks Rank

ROSS is a Zacks #1 Rank ("strong buy") and DLTR is a Zacks #2 Rank ("buy") stock classified in Retail-Discount. ARO is a Zacks #2 Rank stock classified in Retail-Apparel/Shoe. DKS is a Zacks #1 Rank stock classified in Retail-Misc/Diversified. KSS is a Zacks #2 Rank stock classified in Retail-Regional Department Stores.

The Zacks Rank is a quantitative model that solely factors earnings surprises and changes to the consensus estimate. Though it has a long track record of identifying stocks likely to outperform, it does not consider growth or valuation.

*Numbers based on retailers within the S&P 500.

Zacks Premium and Zacks Elite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.

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