Retailers Facing Tough Comps

According to the International Council of Shopping Centers (ICSC), US chain store sales for May fell by 4.6%. The ICSC had expected May sales to be drop 3%. Additionally, the 25 retailers that we track experienced a sales drop of 4.8%, and roughly two out of three retailers missed sales estimates for the month of May.

The year-over-year decline in sales was due in large part to difficult comparisons. At this time last year, Uncle Sam was sending out $600 tax rebate checks to consumers, who used a portion of those funds to go shopping. Of course, rising unemployment, lower wages and a penchant for saving over spending might have had something to do with the weak sales.                                        

During May, the winners were specialty retailers Aeropostale (ARO - Snapshot Report), up 19%, and Buckle (BKE - Snapshot Report), up 13.4%. Retailers that disappointed were Abercrombie (ANF - Analyst Report), down 28%, and Target (TGT - Snapshot Report), down 6.1%. We would like to point out this is the first time in about 30 years that Wal-Mart (WMT - Snapshot Report) did not report monthly sales. Wal-Mart accounts for over half of sales from retail stores, and it has a significant impact on overall results. The world’s largest retailer announced last month that it was going to stop reporting monthly sales and will only report sales on a quarterly basis.

The May sales reports were clearly disappointing. Retailing stocks sold off on the news, and we think many names in this space are vulnerable to further declines. Retail stocks are still up big for the year thanks to low expectations, big-time cost cuts and better-than-expected first quarter results.

Going forward, it will be difficult for these stocks to keep their gains without a rebound in sales (less bad or stabilizing trends won’t cut it). Investor expectations have moved higher, and many retail stocks priced to perfection based on 2009 and 2010 earnings. Cost-cutting efforts are largely played out and already factored into analyst estimates. As a result, retailers have a slim of chance of beating estimates by the same magnitude that they did in the first quarter.

The only way for most retailers to beat expectations is to generate higher-than-expected sales, while maintaining lower cost structures. Unfortunately, we do not believe the consumer is in a position to increase discretionary spending. Consumers are saving more, paying down debt and acting more frugal with their purchases. Meanwhile, unemployment is rising and gasoline prices are climbing. This leaves consumers with fewer dollars to spend on clothes, electronics or housewares.