August a Limp End to Summer for Many Retailers

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With retailers reporting mixed same-store sales for August, a nagging concern is preying on investors: Will the consumer stop buying?

Already some investors are shying away from the group, which had outperformed the broader market in the year's first half. "I'm not buying retailers," says Seth Tobias, of

Circle T Partners

, a New York hedge fund.

Retail stocks tend to post weaker performances as they head into the volatile Christmas season. But this year, with stock market gains evaporating as quickly as they accumulate, investors worry that an ebbing net-wealth

effect -- the idea that stock market gains make people feel richer and, conversely, losses make them feel poorer -- could curtail consumer spending.

"The performance of stocks leads retail sales by about four weeks," says Jason Trennert, of

International Strategy & Investment

, a New York research firm. "It wouldn't be surprising to see consumer spending slow over the next few weeks."

August came as a limp end to a spring and summer season that saw relatively strong sales gains for most retailers. Analysts had expected the Labor Day shift -- which falls one week later this year and will be counted in September sales figures as opposed to August's like last year -- to dampen consumer spending, since that weekend tends to kick off the back-to-school shopping season. But given those watered-down expectations, retailers on the whole still disappointed.

The

LJR Redbook Research index of retail sales

gained 3.8% for the month, which is less than the 4%-plus the firm had anticipated. "It was a good month for discounters and a soft month for department stores, which are more affected by the later Labor Day and ran into weakness with their back-to-school programs," says John Pitt, a Redbook researcher.

The malaise in department stores caused a 0.6% decline in

Salomon Smith Barney's department-store sales index

for the month. The New York firm's total retail sales index rose 4.3%, a bit shy of expectations. "We expect September's sales to accelerate from August's levels but

they will be watched very closely for any signs of slipping momentum by the consumer," wrote analyst Richard Church in his monthly sales update to clients.

Federated Department Stores

(FD)

declined 1.7%% to 43 1/4, while

May Department Stores

(MAY)

dipped 1.2% to 58.

But specialty stores, which also rely on back-to-school sales, fared better. That leads some analysts, like Kindra Hix, with

NationsBanc Montgomery Securities

in San Francisco, to conclude that consumers are shying away from the homogenous department-store format.

"Department stores look the same," Hix says. "They all carry the same brands. You've seen consumers shift to the differentiation of specialty stores. The ones with the clearest focus are the most successful like the Gap."

Gap

(GPS) - Get Report

shares jumped 11.5% to 53 1/2 after the retailer reported a 9% same-store sales increase.

Less successful concepts like

Gadzooks

(GADZ)

, which reported an 8.3% decrease in same-store sales, are lacking focus, she adds. Gadzooks shares traded at 8, not far above their 52-week low of 5 7/8.

Also in the specialty sector,

AnnTaylor

(ANN)

continued to solidify its turnaround by posting a 15.5% same-store sales gain. Shares inched up 3% to 26. "The July comp was driven by a good transitional line," Hix says. "August was more motivated by fall apparel. It gives us reinforced confidence in the company's third-quarter earnings." She rates the company a buy and her firm hasn't performed any underwriting for the company.

Warehouse clubs like

Costco

(COST) - Get Report

also came through with strong numbers. Costco reported that same-store sales for the month increased 6%, which pushed the stock up 9.8% to 49 1/2 and helped erase yesterday's losses that were fueled by a

rumor that the

Securities and Exchange Commission

was investigating its accounting methods.

"Costco has not been contacted by the SEC on any accounting matter during the past several years," the company stated in a press release today. "Costco has not and does not engage in improper account practices." The release noted that Costco had recognized its membership fees on a cash basis, as opposed to a deferred basis, since its inception in 1976. It added that while it's not planning to change its accounting policies, in the unlikely event that it decided to do so, a change "would not have a material effect on its financial condition, cash flows or ongoing operating results."