Taking the Pulse of the Retail Market

Retail continues to be a hard sell given the soft jobs market and continuing decline in housing prices. These factors do not offer improvements in consumer confidence.

The core retail sales reading for June saw a decline of 0.5%, better than the 1.1% decline in May, but worse than the decline of 0.2% expected. Excluding autos, the decline was 0.1%, worse than the estimate of zero growth.

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) 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%.

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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.

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. The durable goods orders reading for May saw a decline of 1.1%, down from growth of 3.0% in April. We need to see sustained growth in durable goods orders such as 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 for the recent week came in at another new 13-year low due to the end of the home tax credits and despite rates for mortgages being at a record low. This was a concern, and now we see it is playing out. Not a 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 May was weaker than expected, as were housing starts.

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, such as heavy discounting, which will drive down operating margins.

My view is to continue to be careful with retailers and focus on the discounters and big-box stores.