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Retailers to Feel Pinch as Shoppers Curtail Spending

Stocks in this article: PEZ VCR XRT

NEW YORK ( TheStreet) -- Although many retailers reported first-quarter earnings results which beat Wall Street's expectations, an ambiguous recovery in consumer spending and confidence will likely put a strain on near-term growth and profitability.

On one hand, retail giant Target (TGT) said same-store sales in May jumped 1.3%, a hair ahead of expectations as it witnessed a rise in credit card sales, suggesting consumers are more willing to extend themselves. On the other hand, clothing retailers, which are a good indicator of consumer discretionary spending, such as Abercrombie & Fitch (ANF) and Hot Topic (HOTT), reported sales that fell short of expectations. Additionally, warehouse giant Costco Wholesale (COST) saw an uptick in sales of food, an essential item, and a decrease in the volume of televisions sold in May.

These trends indicate that once again, consumers are starting to penny-pinch and only spend on necessities. A retailer like Target, which many consumers visit to purchase food, toiletries and other household essentials, is less likely to feel the revenue stream impact from a decline in consumer discretionary spending than a retailer like Abercrombie & Fitch.

This erratic consumer sentiment is primarily being driven by a job market which fails to improve and remains weak. According to data from the U.S. Labor Department, the unemployment rate in 78% of the metropolitan areas covered by the Labor Department was higher in April than a year ago. Additionally, the April report indicated that year-over-year decreases in nonfarm payroll employment was seen in 300 metropolitan areas. To make things even more challenging, a study conducted by the payroll giant ADP and consulting firm Macroeconomic Advisers suggests that the four-week moving average of initial claims for jobless benefits increased in the last week of May.

The nation's overall unemployment rate continues to hover around 10%, and is likely much higher than this because the data that is used to derive the percentage comes from household surveys and not actual payroll data. With elevated unemployment rates, it is difficult to sustain an increase in discretionary spending.

(The Labor Department on Friday reported nonfarm payrolls jumped 431,000 in May, while e the nation's unemployment rate fell to 9.7%. Economists had predicted that employers would add about 500,000 jobs to nonfarm payrolls in May).

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