Is Retail on the Up?

Retail continues to be a hard sell despite some improvements in consumer confidence and areas that help to drive consumer spending such as housing and jobs. The core retail sales reading for April saw growth of 0.4%, short of the 0.6% estimate and down on a sequential monthly basis.

The results from the retailers have been mixed, with discounters and big-box stores generally faring the best, as consumers shop for the lowest prices and heavy discounting. Specialty and high-end retailers continue to show mixed results and this will likely continue this year and into 2011.

Target Corporation (NYSE/TGT) just reported an excellent fiscal first quarter, in which it managed to beat on both earnings and sales. The key comparable same-store sales increased 2.8% year-over-year, while the gross margin expanded to 31.30%.

The results are good, but they do not indicate improvements across the board for all retailers. Behemoth Wal-Mart Stores, Inc. (NYSE/WMT), for instance, also managed to report record earnings and sales in its fiscal first quarter that beat Wall Street estimates. Yet, when you take a closer look, comparable same-store sales for all U.S. Wal-Mart and Sam’s Club stores for the 13 weeks ended May 1 jumped 2.9%, with the impact of fuel prices. My concern is that the company predicts comparable same-store sales without the impact of fuel prices to fall two percent for the 13 weeks from May 1 to July 30, 2010, worse than the 1.5% in the same period in 2009.

The reality is that, while things are definitely better than they were last year, there will continue to be hurdles to overcome for the retailers. My thinking is that consumers will continue to search for bargains and heavy discounting before buying. The demand for big-ticket items has shown some improvement, but will continue to be a struggle going forward. These items include furniture and appliance retailers, which will continue to face volume and margin pressures.

My view remains the same. There needs to be improvement in the housing area for consumer spending to improve. When people buy homes, they purchase furniture, appliances and other home accessories. Case in point: applications for mortgages are at a 13-year low due to the end of the home tax credits. This was a concern and now we see it is playing out. Not good news for those looking for a rebound in home buying activity to help drive up home prices across the country. The key building permits report for April showed a weaker-than-expected 11.5% decline, with the number of permits the lowest since October 2009.

The mixed housing results continue to firmly indicate a housing market that is still not recovered. This will pressure consumer confidence and impact the key consumer spending and GDP. This means that retailers will need to continue to look for new angles to entice consumers to spend.