Soggy Wal-Mart Report Damps Retail Outlook

May same-store sales reports will likely lack the luster of April's strong results as gas woes take their toll.
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Consumers brushed aside a precipitous rise in gas prices in April to keep shopping, but don't expect a repeat performance for May.

For investors awaiting Thursday's retail same-store sales reports for the month,

Wal-Mart's

(WMT) - Get Report

disappointing preview of its results didn't provide much encouragement. The world's largest retailer said over the weekend that it would post a 2.3% gain in comps -- the low end of its previous forecast for a 2% to 4% increase -- as higher gasoline and utility prices weighed on its customers.

Ken Perkins, president of market research firm RetailMetrics LLC, says Wal-Mart's weak projection lowered his firm's forecast for overall same-store sales growth in May by 50 basis points to 3.4%. That compares to last year's gain of 2.9%, which marks the lightest monthly comparison facing retailers for the rest of the year.

"Wal-Mart isn't always a good harbinger of what happens throughout the entire sector, but in this case, it may signal some weakness here," says Perkins. "It seems like gas prices are starting to bite consumers, so there is a chance we'll see softness along the lines of what we saw in February and March, when comps were weak."

Retail sales picked up in April, despite a spike in gas prices, thanks in part to Easter falling in April this year. RetailMetrics' same-store-sales index, which tallies results from more than 60 major retail chains, posted a 6.6% increase for April -- its biggest monthly gain in two years. That beat the firm's forecast, which called for a 5.9% gain.

Now, with concerns about inflation, the housing slowdown and consumer exhaustion leaving the major stock indices in a selloff, expectations for retailers are being ratcheted down. On Tuesday, shares of Wal-Mart shed $1.35, or 2.7%, to $48.30. Meanwhile, the S&P Retail Index dropped 1.7%, while the

S&P 500

closed down 1.6%.

Also, the Conference Board reported Tuesday that its consumer confidence index fell to 103.2 in May from 109.8 the prior month. That beat Wall Street's expectation for a decline to 100.9, but the index was driven down mostly by an 8.6-point drop in the key expectations component, which hit a seven-month low.

So far, retailers that have previewed May same-store sales have reported spotty results.

Last week, home-improvement chain

Lowe's

(LOW) - Get Report

said May same-store sales were running at the low end of its guidance for 3% to 5% growth. Meanwhile, the company's chief competitor,

Home Depot

(HD) - Get Report

, showed some indications of top-line weakness in its first-quarter report and ceased its practice of giving same-store sales results.

In apparel,

Wet Seal

(WTSLA)

surprised investors by saying its May comps would drop in the high single-digits, breaking a long string of double-digit gains for the rejuvenated teen-clothing chain. The company blamed the decline on a lack of inventory in fashion tops and dresses at its namesake chain.

Gap

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said it continues to see a "challenging" first half of the year, and

Chico's

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projected mid-single-digit same-store sales increases for the balance of the year at its namesake stores. That would mark a slowdown from the company's record of double-digit growth.

"We think May is unlikely to be as strong as April

for apparel retailers, given the clear benefit of the Easter shift in the unexpectedly strong April results," wrote Bank of America analyst Dana Cohen in a recent research note. "However, we still think it looks relatively solid, particularly in contrast to data points suggesting some slowing in other areas of retail and consumer."

Christine Chen, an analyst with Pacific Growth Equities, says she is cautious on the sector overall, but the teen-apparel space looks like it could continue to show strength.

"Teenagers are just resilient to what's going on in the economy because they don't know and they don't care," says Chen. "They're not spending their own money, and history shows that parents will cut back their own expenses before they will cut back on their kids' expenses, unless things get really bad."

Chen says fashionable teen destinations like

Abercrombie & Fitch

(ANF) - Get Report

and

American Eagle Outfitters

(AEOS)

are likely to see continued strength in sales. She also believes

Guess?

(GES) - Get Report

and

bebe

(BEBE)

will be standouts.

"There's a lot of changes in fashions right now, so the fashionista was still out in full force in May," she says. "Overall, though, expectations are low and most of the companies out there offered conservative guidance, so it will be interesting to see how things play out."