February 1, 2012

Gift Card Redemptions and Clearance Drove Shoppers to Malls in January

by Jharonne Martis

In spite of unseasonably warm weather, a highly promotional environment and some difficult comparisons to year-ago levels, Thomson Reuters expects retailers to post a 2% gain in same-store for January above the levels seen in January of 2011, as measured by the Thomson Reuters Same Store Sales Index. That’s lower than the monthly gains of 3% to 5% in same-store sales recorded throughout 2011, and below the index’s 4.8% jump in January of 2011, but within that aggregate figure lie results that vary widely, from declines in sales at The Gap to significant increases from high-end department stores.

Meanwhile, analysts now are calling for the Thomson Reuters Quarterly SSS Index, a benchmark consisting of 84 retailers, to post growth of 2.3% in same store sales during the fourth quarter of 20111, compared to 1.2% in the same period of 2010.

Consumers began the New Year by hitting the malls to redeem gift cards. The month of January is considered a transition month, as retailers shift some of their winter offerings to the sale racks in order to introduce the new spring merchandise. January had warmer than average weather, which hurt cold-weather categories. On the flip side, warmer temperatures may benefit February SSS, when retailers introduce their new spring merchandise, which they will begin offering at full price.

Despite the headwinds, analysts polled by Thomson Reuters expect most sectors of the retail industry to post positive January SSS, and are projecting that discounters will show the biggest gains, with a 4.1% jump in same-store sales. Excluding Gap, the Apparel sector seems likely to be January’s second strongest performer, with a 3.1% increase in same-store sales, followed by the Department stores, with a 2.8% gain. There are a few standouts, companies that have managed to significantly outperform their peers and the industry as a whole, including The Buckle, Saks, Costco and JW Nordstrom (Exhibit 2). One good proxy for discretionary spending is how much teenagers are willing to spend; analysts surveyed by Thomson Reuters expect that sector to register a 2.6% SSS advance for January.

The Discount sector appears likely to emerge as January’s outperformer within the retail industry, although its forecast 4.1% growth in same-store sales lags the 5.3% jump it posted in January 2011. Analysts expect Costco to report one of the strongest comps in the group, at 6.1%, although that also will fall below its 9.0% January 2011 result. Excluding sales of gasoline, that Costco SSS figure decreases to 5.3%. Meanwhile, Target appears likely to post a gain of 2.0% in same-store sales, analysts agree, followed by Fred’s, with a 1.4% advance. Target will be launching a new line by fashion designer Jason Wu on February 5th, merchandise that will only be available to Target customers for a limited time. Given the designer’s high profile and success, this partnership could boost February SSS at Target.

Department Stores are likely to post a 2.8% increase in same-store sales for January, a slightly slower pace of growth than was seen last January, when SSS were 3% higher. High-end stores offer the most impressive gains in same-store sales: Saks, at 6.2%, and JW Nordstrom, at 5.3%, posted better higher rates of growth in SSS than the levels seen in January 2011 of 4.4% and 4.8%, respectively. Moreover, based on the proprietary StarMine SmartEstimate score, Saks is likely to post earnings for the fourth quarter of 2011 that are higher than the current consensus estimate. (See Exhibit 3)

Macy’s seems likely to register a 3.5% comp for January 2012, above the 2.6% gain recorded in January 2011. On the flip side, Kohl’s is still struggling; analysts expect it to register the weakest result in the group and to post only a 0.3% increase in SSS, followed by Stage Stores with a 0.5% gain in SSS. JC Penney registered a 0.7% average monthly increase in SSS in 2011, below the average monthly SSS growth rate of 1.6% it reported in 2010, indicating that its sales slowed throughout the year. The retailer hired a new CEO and announced that it will no longer provide monthly sales and quarterly earnings guidance. The company will be under close scrutiny from Wall Street, and analysts will be particularly vigilant in reviewing JC Penney’s earnings releases and quarterly same-store sales results in light of the lack of guidance Currently, we expect JC Penney to register a 0.4% drop SSS for Q4 2011, a big contrast to the gain of 4.5% in same store sales that it reported for the same period in 2010.

We expect the Apparel sector to post some weak results, particularly when compared with the sizeable gains in same-store sales reported a year ago. The group as a whole is like to report only a 0.7% gain in same-store sales, compared to the 5.9% level recorded in January 2011. But those figures improve if one excludes Gap Inc., one of the weakest performers and the heaviest-weighted components in the sector. Gap Inc. is expected to report the weakest SSS in the retail universe, with a 4.9% decline in same-store sales. (The retailer intends to close over a hundred stores nationwide by the end of this year.) Setting aside Gap’s figures, the group is likely to see same-store sales advance 3.1%; a better performance, but one that still lags the 7.9% gain posted in January 2011.

Given the consumer’s interest in capturing bargains, retailers who offer lower priced or discount merchandise likely will register some of the healthiest comps within the sector. Ross and The TJX Companies, Inc., for instance, should post gains in same-store sales of 3.6% (vs. 3.0% for January 2011) and 3.4% (vs. 2.0% for January 2011), respectively. Limited Brands is facing the most difficult year-ago SSS comparison in the retail universe, with analysts projecting that the retailer to register a growth of 2.7% in same-store sales, a far cry from the 24.0% jump it recorded in January 2011). Its Victoria’s Secret division is the company’s strongest segment; we expect its same-store sales to climb 3.8%. While Gap is by far the weakest player in this universe, Stein Mart also is struggling, although its forecast 0.5% gain in same-store sales is an improvement on the 1.2% decline it recorded a year ago.

Apparel stores catering to teens aren’t likely to measure up to last January’s robust 7.6% jump in same-store sales and likely will see only a 2.6% increase in SSS during January of 2012. Wet Seal weighs on the sector; the company is likely to see SSS fall 3%. On the flip side, The Buckle is enjoying the strongest comp expectations, at 7.3%, followed by Zumiez at 4.1% (compared to 15.3% for January 2011).

While retailers may be struggling to convince bargain-hunting consumers to open their wallet, the macroeconomic background in the US is showing signs of improvement. The Thomson Reuters/University of Michigan Survey of Consumers improved in January on news of potential job growth (Exhibit 4). Moreover, US GDP grew at an annual rate of 2.8% during the last three months of 2011. The unemployment rate is showing signs of stabilizing at a slightly lower level; economists expect it to have remained unchanged in January at 8.5%. This could help boost consumer confidence – and retail sales — and generate further economic growth as we move forward into 2012.

SmartEstimates: Thomson Reuters StarMine Professional quantitatively analyzes the earnings estimate accuracy of sell-side analysts and uses this information to create proprietary SmartEstimates®. SmartEstimates help you better predict future earnings and analyst revisions with estimates that place more weight on recent forecasts by top-rated analysts.
Predicted Surprise %: The Predicted Surprise% is the percentage difference between the SmartEstimate and the I/B/E/S consensus estimate. When SmartEstimates diverge significantly from consensus, it serves as a leading indicator of the direction of future revisions and/or surprises. In aggregate, this indicator gets earnings surprises directionally correct 70% of the time.

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