Even the Best Retailers See Trouble

NEW YORK ( TheStreet) -- As the weather heated up in May, retail same-store sales cooled off.

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Of the 23 retailers tracked by TheStreet, 12 missed Wall Street's estimates, with even some of the top-notch performers disappointing.

"Unlike the April same-store sales report, May's batch of numbers contained a singular message," Wall Street Strategies analyst Brian Sozzi wrote in a note. "That message, echoing the commentary on first-quarter earnings conference calls, is one of reality coming home to roost."

Having endured a stretch of time when inflationary concerns were merely an ominous, overhanging cloud, these pressures are now very real. In today's numbers, it is evident that the average consumer, especially those on the lower end of the income spectrum, is in adjustment mode, Sozzi noted. These consumers are analyzing where they shop, how often they shop and the number of items in their baskets.

>Live Blog: May Retail Sales

Based on these results, it looks like the second quarter didn't get off to a great start for retailers. On top of this, there is the looming question of how consumers will react to higher prices.

Investors are selling on these fears and unanswered questions, taking profits from even some of the best names in the space.

"We believe the space will remain a stock picker's universe, with a need to focus on company-specific margin expansion and improving trends," Janney Capital Markets analyst Adrienne Tennant wrote in a note.

While pressures are being felt across the board, it is still safe to say that high-end retailers like Nordstrom ( JWN) and Saks ( SKS) are still in safer territory. The strength of these luxury retailers is generally more dependent on the stock market than macroeconomic conditions. But if the last few weeks are any indication, the ride for these companies could also end this summer.

Here's a look at the retailers that revealed some cracks in consumer spending in May.

Limited Brands

Limited Brands ( LTD)reported a rare miss in its same-store sales, which gained 6%, shy of the 7.8% increase analysts expected.

Lean inventory, especially at its Victoria's Secret Pink brand, likely held back results, according to UBS analyst Roxanne Meyer.

Still, Limited has managed to continuously post material same-store sales increases while reducing its promotions year over year.

Wall Street has come to not believe what is typically Limited's low-balled forecast. The specialty retailer did say that it expected May sales in the low-single-digits, guidance it did meet.

Limited expects June same-store sales up in the low-single digits and said it will be carrying less inventory than last year.

Zumiez

Zumiez's ( ZUMZ) headline sales number beat expectations, but the skate-and-surf inspired retailer is starting to see a slowdown.

The company reported a 7.8% gain in May same-store sales, slightly ahead of expectations of a 7.4% advance. But shares of Zumiez fell more than 11% in morning trading, as investors question how much wind is left in its sails.

"We are moving to the sidelines on shares of Zumiez, after a strong five-quarter run of solid comps and earnings upside. ... We continue to believe that Zumiez has one of the most differentiated concepts in the mall, ample unit growth and ongoing opportunity for margin expansion," Tennant, who downgraded her rating on the stock to neutral, wrote in a note. "However, we have a very cautious view of the softline sector, and this view is causing us to take profits on some of the best-performing retailers in the space, like Zumiez, particularly near and above $30."

Sozzi also warns investors to listen to the message of moderating trends and pay attention to another month of softness in units per transaction, which he associated with price increases.

Costco Wholesale

On the surface, Costco Wholesale's ( COST) May same-store sales report may seem to be a standout, but this is not being reflected in the stock, as investors zero in on the real message.

The wholesaler posted a 13% surge in comparable sales, topping Wall Street's forecast of an 11.2% gain. Member traffic also rose a healthy 4%. But excluding gasoline, Costco's same-store sales would have been up just 7%.

"Costco's results excluding gas inflation and currency comp trend in the U.S. suggests March may be the peak for the year," Sozzi wrote in a note. "Additionally, the spike in gasoline prices earlier in the year has correlated to a spike in club traffic. So in reality, are Costco's sales numbers as heady as they appear?"

It looks like the market is interpreting the mid-single digit percentage same-store sales gain in hardline and softline categories as signs on financial strain on Costco's member base.

Target

Target ( TGT) The discounter reported a 2.8% increase in same-store sales, below estimates of 3.5%.

"May sales were near the low-end of our expected range, driven by much slower traffic trend in the second-half of the month," CEO Gregg Steinhafel, said in a statement. "Our guests continue to shop cautiously in light of higher energy costs and inflationary pressures on their household budgets."

It looks like Target will need to get even more competitive on price, with Steinhafel saying the company is focused on "delivering more value than ever by offering reliably low prices on high-quality, well-designed merchandise."

It is unclear if Target will need to go into hard-core discount mode due to Wal-Mart ( WMT)returning to its motto of everyday low prices, or if it's a result of a panic-stricken consumer. Regardless, Target's gross margin outlook for 2011 will be a growing concern.

>To contact the writer of this article, click here: Jeanine Poggi.

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