Retailers Warn on High Costs Even as Sales Beat

Retail Reuters

U.S. retailers warned of rising costs and cautious consumers even as a late Easter boosted sales of clothing and other holiday-related items in April, helping many beat sales expectations.

Continue Reading Below

Gasoline pushing above $4 a gallon and a slow recovery in the job market are also likely to weigh on sales for the next several months, with no major events to spur shopping until the key back to school season, analysts said.

"The consumer has been resilient throughout with spending," said Ken Perkins, president of research firm Retail Metrics. "I don't see a catalyst between now and back to school, though."

Sales at stores open at least a year rose 8.9 percent at the 25 retailers tracked by Thomson Reuters, compared with expectations for an 8.2 percent increase.
For a related graphic, click http://r.reuters.com/suf49r

Clothing retailer Gap Inc posted an 8 percent increase in April same-store sales, surprising analysts who, on average, had expected a 0.8 percent drop.

At the same time, the company also estimated earnings for the April quarter below analysts' expectations and said merchandise margins were down significantly, with raw materials costs rising more than it expected.

Continue Reading Below

Rising costs are pressuring clothing manufacturers, which are trying to pass some of them on to consumers who may not be willing to pay more for items that do not stand out, especially while unemployment remains high. The number of Americans filing for jobless benefits rose to an eight-month high last week. 1/8ID:nN05259672 3/8.

"If you don't have differentiated product, and that's one of the big issues that the Gap has at some point, you have pressure on the margin front," Perkins said.

One large retailer that missed expectations was J.C. Penney Co, which posted a 6.4 percent increase in same-store sales, while analysts expected a rise of 8.5 percent. The company said it expected to report quarterly earnings of about 24 cents per share before items, higher than its previous forecast, but below analysts' expectations.

J.C. Penney shares were down 2.8 percent in midday trading on Thursday.

The Standard & Poor's retailing index gained nearly 1 percent after starting out lower following the sales reports. A 6 percent drop in oil futures helped ease concern about rising gasoline prices, analysts said.

Through Wednesday, the S&P retail index had risen 15.9 percent since March sales were reported, compared with a 13.6 percent increase in the S&P 500

GOOD FOR SOME

The late Easter accounted for only some of the April sales increase, International Council of Shopping Centers chief economist Michael Niemira said, adding that retailer's underlying performance was better than in the beginning of the year.

"But I think the drag from higher gasoline prices will hold the rate to something closer to a 3-4 percent rise in same-store sales in the near term," Niemira said.

The biggest factor boosting sales was Easter, which was on April 24 this year. Last year's holiday, on April 4, moved many holiday-related purchases into March.

Consumers also are receiving their tax returns later this year and using less of the money to pay down debt than last year, said Britt Beemer, founder of America's Research Group.

"Every family has a lot more money to spend right now," Beemer said, but added that this is only a temporary boon.

Gasoline also helped sales at retailers that sold the fuel, but rising prices for it are likely to weigh on discretionary purchases this summer.

"I paid $4.45 a gallon today," Patty Edwards, chief investment officer at Bellevue, Washington-based Trutina Financial, said on Wednesday. "I'll tell you, that is certainly cutting into my Nordstrom fund."

Upscale retailer Nordstrom posted a 7.6 percent increase in April same-store sales, below the 8.1 percent rise analysts were expecting. Its shares were up 0.2 percent after falling initially.

Target Corp's same-store sales were up 13.1 percent, just below analysts' expectations.

"Guests continued to be very cautious in their spending leading up to Easter," said Target CEO Gregg Steinhafel.

Department-store operator Macy's Inc reported a 10.8 percent increase, above the 8.1 percent gain analysts expected.

Sales of gasoline helped Costco Wholesale Corp beat estimates, although selling more of it also cuts into the retailer's margins.

But Costco also showed the inflation pressures that are weighing on consumers, not only in higher prices for gasoline, but also for groceries as food companies pass on increased costs of ingredients and transportation.

For example, fresh food prices were up at mid-to-high single-digit percentage rates, the company said.

"Costco had the type of April sales performance that captured the very essence of the news flow that dominated during the month: inflation, weak dollar, and a slightly more guarded U.S. consumer," Wall Street Strategies analyst Brian Sozzi said in a research note.

Victoria's Secret parent Limited Brands Inc blew through expectations with a 20 percent increase in April sales, compared with the analysts' average estimate of 12.2 percent.

The company, which also owns Bath and Body Works, raised its quarterly earnings outlook to a range of 37 cents to 39 cents a share, excluding items. It had previously expected 26 cents to 31 cents, and analysts had forecast 36 cents.

(Additional reporting by Jessica Wohl in Chicago, Alina Selyukh in New York and Nivedita Bhattacharjee in Bangalore Reporting by Brad Dorfman, editing by Bernard Orr and Lisa Von Ahn)

((bradley.dorfman@thomsonreuters.com; +1 312 408 8133; Reuters Messaging: bradley.dorfman.reuters.com@reuters.net)) 

What do you think?

Click the button below to comment on this article.