May 2, 2012

The Easter Bunny Hops Off Into the Sunset and Retailers See Sales Growth Rates Slow

by Jharonne Martis

The Easter Bunny vanished over the horizon in the first days of April, leaving retailers without much of an impetus to keep driving same-store sales higher at the same rates they reported earlier in the year. Indeed, Thomson Reuters expects that retailers will post, collectively, a gain of only 1.5% in same-store sales for April, significantly below the 9.0% advance recorded last April. Still, nearly all groups within the Thomson Reuters Same Store Sales Index appear likely to report higher sales, with the Teen and Drug Stores groups the only exceptions. Excluding the Drug Store sector, the SSS growth rate appears likely to jump 3%, double the overall gain but still at the bottom of the range in monthly SSS gains (of 3% to 5%) reported throughout 2011. Weather didn’t help: an unexpected jolt of cold air across much of the United States dampened shoppers’ enthusiasm for spring clothing and drove mall traffic lower in the second half of the month.

Without Easter to prod shoppers into buying new clothes, candy and other treats until at least the middle of the month, April SSS growth was bound to weaken, as retailers began reminding their investors several months ago. But Easter isn’t the only culprit: this year saw Mother’s Day promotions shifted into May from April last year. As we have noted previously, to get a fair reading of sales growth for both March and April, we will have to combine their readings and calculate an average. On that basis, Thomson Reuters expects retailers to have experienced a 2.9% gain in same-store sales for that two-month period, a sharp drop from the 5.4% growth seen in the same period for last year. Excluding the Drug Stores group from the mix, however, makes the picture somewhat brighter: the forecast growth in the index rises to 5.4%, a much smaller drop from the 6.4% growth recorded a year earlier.

Exhibit 1. Cooler weather, and the shift in holidays hurt April’s retail sales

Source: Thomson Reuters I/B/E/S estimates. Note: Aggregate mean data is revenue weighted.

Analysts polled by Thomson Reuters expect that discounters will once again be among the strongest performers in April, with a forecast jump of 3.9% in same-store sales. That group is followed by the Apparel sector, for which analysts expect a 2.2% increase in same-store sales. Analysts believe that Department stores will record a 1.6% gain. As has been characteristic, in most sectors a few companies have emerged as standouts, beating both their peers and the retailing industry as a whole, including such familiar names as Zumiez, JW Nordstrom, Costco, and Ross Stores. (See exhibit 2 for details).

Gap, Inc. is facing one of the most difficult year-ago SSS comparison in the retailing universe. As a result, analysts believe the company will see a 0.8% decline in same-store sales, a sharp contrast with the 8% jump it announced in April 2011. Gap’s North American division is the company’s strongest; we expect its same-store sales to climb 1.0%. Given the cold snap in the weather and those difficult comparisons to year-ago levels, analysts polled by Thomson Reuters believe that April will prove to be an anomaly and that Gap will post much healthier SSS gains in the coming months thanks to its recent success in overhauling its styles and introducing “must-own” products like the brightly-colored skinny jeans spotted everyone this spring.

Exhibit 2. Zumiez Is on Top, While Wet Seal Is Expected to Post the Weakest Negative SSS

Source: Thomson Reuters I/B/E/S estimates.

The fact that the Discount sector appears likely to emerge as April’s outperformer doesn’t mean that its forecast SSS growth rate of 3.9% is all that impressive, especially when compared with the 12.4% jump recorded in April 2011. Analysts expect Costco to report one of the strongest comps in the group, although the 5.1% forecast still is well below last year’s 12% jump. Excluding the impact of gasoline sales, that Costco SSS figure decreases to 4.8%. Meanwhile, analysts agree Target is likely to post a gain of 2.8% in same-store sales, while Fred’s will record a 0.6% advance.

The weather and the impact of the timing of Easter also are likely to take a toll on SSS results at Department Stores, with the 1.6% forecast gain measuring up poorly when contrasted with the 9.7% recorded a year earlier. Once again, high-end stores offer the most impressive gains in same-store sales: JW Nordstrom and Saks are forecast to report gains of 5.8% and 4.0%, respectively, coming in the wake of 7.7% and 5.8% advances in April 2011. Thomson Reuters’ proprietary StarMine SmartEstimate score offers some other good news for investors in Nordstrom: the model shows that the department store company is likely to post earnings for the first quarter of its fiscal year, ended April 2012, that are higher than the current consensus estimate. (See Exhibit 3 for details.) Macy’s appears likely to extend its winning streak by reporting a 1.9% gain in SSS, analysts expect. While that is well below the 10.8% gain it rang up a year earlier, it’s still in positive territory. Not all department stores will be celebrating however: analysts expect Stage Stores and Kohl’s to report same-store-sales fell by 4.8% and 1%, respectively, during April.

The unexpectedly cold weather in April seems to have caused shoppers to postpone their purchases of new spring fashions, a fact that we believe will take a toll on the Apparel retailers. Making their task even harder, many companies in this group already faced tough comparisons to the big gains in SSS they reported last April. The group as a whole is likely to report only a 2.2% gain in same-store sales, compared to the 9.6% advance recorded in April 2011, although excluding Gap (one of the weakest performers and the heaviest-weighted components in the sector) that gain may end up being closer to 3.5%. (That still falls below the 10.3% gain posted last April, however.) Limited Brands is facing the most difficult year-ago SSS comparison in the retail universe. Analysts project that the retailer registered growth in SSS of 4.0% in April, a far cry from the 20.0% jump it recorded in April 2011. Its Victoria’s Secret division is the company’s strongest and we believe the same-store sales for this unit to climb 5.3%. Stein Mart is among the laggards in the apparel sector, with analysts forecasting a 2.1% decline in same-store sales, compared to the 4.2% advance it announced in April 2011.

Apparel stores catering specifically to teens appear likely to be one of April’s weakest segments within the retail universe. While last year this group announced a 13.6% jump in SSS for April, analysts expect them to report a decline of 1.5% for this April. Wet Seal’s performance weighs on the sector; the analysts believe that the company will report a 9% slump in SSS. As always, however, there are exceptions to the rule: Zumiez may post a 6.8% jump in SSS, although The Buckle’s effort to replicate its 14.5% jump in SSS in April was doomed to disappointment; analysts forecast its SSS will rise only 0.9%.

Exhibit 3. April SSS Estimate, Quarterly Earnings: Q1 2012 EPS Estimate vs. Q1 2012 SmartEstimate

Source: Thomson Reuters StarMine Professional and Thomson One Investment Management.

Drug retailers remain by far the weakest group among the industry, and provide a drag on overall SSS results. Analysts expect Walgreens to report a decline of 5.1% in same-store sales in April, in contrast to the 3.4% gain it posted for April 2011; this is the drugstore chain’s fourth month running of SSS declines after a 14-month long winning streak during which it posted steady gains.

While higher gasoline prices continue to put pressure on consumers’ discretionary income, the Thomson Reuters/University of Michigan Survey of Consumers remained largely unchanged in April. “The main challenge to building a lasting economic recovery is renewed job and income growth as well as reducing uncertainty about future federal tax and spending policies,” Richard Curtin, chief economist for the Survey of Consumers said in a report published at the end of April. (For the most recent trend in the Survey of Consumers, please see Exhibit 4, below.) Economists expect that the next monthly jobs market report from the Department of Labor – due out this Friday – will show that the unemployment rate remained at 8.2% in April, unchanged from the previous month. This sign of stability in the labor market could help boost consumer confidence – and thus retail sales — and generate further economic growth as we move into late spring and summer.

Exhibit 4. The Thomson Reuters/University of Michigan Survey of Consumers

Source: Thomson Reuters Datastream.

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