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Don't Be Fooled: Retail Sales Were Strong

Marc Lichtenfeld

Many of the consumer naysayers have continued to warn of gloom and doom because Thursday's retail reports were merely respectable, rather than mind-blowing. But May same-store sales were stronger than much of the media would have you believe.

Thomson Financial's index measuring same-store sales climbed 2.9%. Excluding Wal-Mart (WMT Quote), the index jumped 4.4%, "suggesting the consumer is fully engaged," according to Thomson analyst Jharonne Martis.

The index's rise was stronger than Thomson's forecast Wednesday for 3.7% same-store sales growth. Despite higher gas prices, what appears to be an idling economy, locusts, hail and whatever other plagues can be blamed, the consumer is still willing to spend if stores offer merchandise that resonates with him or her.

As expected, the luxury category was strong in May, led by Saks (SKS Quote). The company reported an extraordinary 37.5% rise in same-store sales, on top of a 1.1% rise last year. That was in part due to a shift in its promotional calendar, and as a result Saks expects June same-store sales, or comps, to decline.

Nordstrom (JWN Quote) also had solid sales, posting a 6.3% rise in comps, much stronger than the 2.6% anticipated by Wall Street. More impressive is that this year's figure comes on the back of last year's 7.8% growth.

But it wasn't just the high end that performed well. Discounters were very healthy, with Thomson reporting a collective rise of 5.1% for the group, excluding Wal-Mart.

Wal-Mart reported same-store sales growth of 1.1%, below expectations of 1.4%. Wal-Mart saw strength in grocery (a low-margin business) and continued weakness in apparel and home (high-margin businesses). In June, Wal-Mart expects comps to be flat to down 2%.

Wal-Mart rival Target (TGT Quote) just missed same-store sales estimates of 5.9% growth with a 5.8% comp. But considering last year's 5.7% May same-store sales jump, it's unlikely that many investors will complain. Target projects June comps to be in the 3% to 5% range.

Within the discount group, the performance of the warehouse clubs was very strong. Wal-Mart's Sam's Club recorded a 6.4% rise in comps, while Costco (COST Quote) logged a 7% jump, on top of last year's 10%. Even beleaguered BJ's Wholesale Club (BJ Quote) scored a nice 4.1% rise on the back of 4.2% growth last May.

The department stores were mixed, but the problems appear to be company-specific rather than a macro story.

Macy's (M Quote) saw same-store sales decline 3.3%, steeper than the 1% drop Wall Street anticipated. But that's no surprise; last month I discussed why I thought this company is in for a difficult 2007.

Dillard's (DDS Quote) numbers also disappointed, with a 2% drop rather than the 1.2% decline Wall Street expected. Conversely, Kohl's (KSS Quote) continued to get it right and was rewarded with a 10.5% comp, much higher than the already strong 6.2% estimate.

The teen retailers were mixed. Abercrombie & Fitch (ANF Quote) missed badly with a decline of 5%, compared with Wall Street's forecast for a 1.2% decline. Year-to-date same-store sales are off 4%. Hot Topic's (HOTT Quote) same-store sales slumped 6.1%.

On the other hand, Pacific Sunwear (PSUN Quote), The Buckle(BKE Quote) and Zumiez (ZUMZ Quote) all posted strong results.

Stick with companies that are simply managing their businesses well, on both the sales and the cost side. Names like Kohl's, Costco and Target immediately come to mind.

Sure, Gap (GPS Quote) and Wal-Mart are enticing turnaround plays, but as I've been advising for months, wait until there is more evidence that things are improving. These businesses and stocks won't turn on a dime.

Closing Thoughts

This is my final column for TheStreet.com. It has been an honor for me to have had you as an audience. I appreciate all of the feedback and notes that I've received from readers over the course of my tenure (even the nasty ones). I'd also like to add that the writers, editors and contributors at TheStreet.com are the finest I have ever worked with and I'll continue to read the site on a daily basis. I hope that our paths cross again.