BUSINESS

Shoppers pull back spending at stores in June; stores worry about back-to-school

07/05/2012 09:23 EDT | Updated 09/04/2012 05:12 EDT
NEW YORK, N.Y. - Retailers could be sweating it out this summer.

Shoppers, worried about jobs and the economy, pulled back on spending in June, slowing sales for most retailers to the weakest pace since 2009. And that could leave merchants on edge, wondering if Americans will spend more when the back-to-school season starts in late July.

"The consumer is in a watch-and-wait mode,'" says Arnold Aronson, managing director of retail strategies at consulting firm Kurt Salmon. "She has to be seduced by value."

The June results, based on revenue at stores opened at least a year, are considered an indicator of a retailer's health. Only a small group of chain stores report monthly sales figures. But the results offer a snapshot of consumer spending, which accounts for 70 per cent of all economic activity.

The figures have shown an uneven recovery. Discounters and high-end stores, for example, notched stronger growth last month.

But for most, sales were disappointing. Big chains like Costco, Kohl's and Macy's, as well as teen retailer The Wet Seal, were among stores whose results fell short of Wall Street expectations.

Shoppers are concerned about the struggling economy. Employers have pulled back on hiring. Europe faces a recession and growth has slowed in China. Worries about jobs sent shoppers' confidence down in June for the fourth straight month.

Tracy Garza, 41, has been waiting all year for hard evidence that the economy is on solid footing. The San Francisco resident picked up a pair of shoes for $25 at Ross Stores and bought some Blu-ray discs earlier in the year but has held back on buying a laptop for $1,200.

"Are you going to spend? Are you going to wait?" says Garza, whose income from freelance writing and Spanish translation has been uneven. "I'm going to wait to get a better idea of where the economy is going."

June is a period when stores clear out summer merchandise to make room for fall goods. So it is typically the second-biggest shopping month behind December. But because spending was so tepid last month and it took more discounts to get shoppers to buy, March may end up the biggest month, says Mike Niemira, chief economist at the International Council of Shopping Centers.

Overall sales growth was only 0.2 per cent, according to the ICSC's tally of 23 stores nationwide. That was lower than the 1.7 per cent increase in May, and it marked the weakest performance since November 2009 when the tally was down 0.2 per cent. Growth would have been higher at 2.6 per cent, excluding drug stores, which dragged down the overall tally.

Shoppers spent more during the first three months of the year, when warmer-than-usual weather and a sunnier outlook for the economy lured shoppers to malls. But since then, shopping, like the economy, has stalled.

Some temporary factors depressed June's retail results. The figures were compared with a hefty sale gain of 6.9 per cent a year earlier, when results were the most robust for that month since 1999. Also, a series of storms left millions without power across a broad swath of the country.

Two trends could help shoppers feel wealthier and give retailers a boost during back-to-school sales, the second-biggest shopping period of the year after the holidays. Gas prices are down 60 cents since their peak of $3.94 in April, and home prices have begun to stabilize in most U.S. markets.

But a big question remains: Will hiring improve? A positive answer would go long way in helping Americans open up their wallets and bolster an economy that relies on consumer spending. On Friday, retailers and shoppers could get a partial answer.

Economists expect U.S. employers to add 90,000 jobs to payrolls when June figures are reported that day. That would be up from 69,000 in May, although the gain wouldn't be enough to lower an unemployment rate stuck at 8.2 per cent.

Against this backdrop, ICSC's Niemira expects a modest 2.5 per cent increase in total back-to-school sales from mid-July through mid-September. If that happens, the result would be lower than last year's 3.6 per cent increase and the 5.4 per cent gain in 2010. But it would be a big improvement over the 4 per cent drop in 2009.

Overall, June's revenue results were lopsided, with discounters and luxury stores faring better than mall-based clothing merchants catering to low to middle-income shoppers.

Costco's revenue from stores open at least a year rose 3 per cent but fell short of the 3.7 per cent estimate from analysts polled by Thomson Reuters. Target had a 2.1 per cent increase as shoppers spent more on food and health and beauty items. That was slightly lower than the 2.4 per cent rise analysts expected.

Among department stores, Macy's, traditionally a strong performer, reported a slim 1.2 per cent gain.

"In part, this was a function of a macroeconomic environment that is stagnant at best, and lower spending by tourists in cities such as New York," said Terry Lundgren, CEO of Macy's. He added sales were also slowed by the renovation of Macy's Herald Square store in Manhattan, which is creating more disruptions than expected.

Kohl's sales fell a worse-than-expected 4.2 per cent in June, as the department store chain tried to build back inventories after reducing them too much earlier in the year.

A deteriorating economy could add to the woes at rival J.C. Penney, which is getting rid of hundreds of sales in favour of everyday low prices. The company, which no longer reports sales on a monthly basis, notched an almost 20 per cent drop in revenue at stores open at least a year for the first quarter.

Among teen retailers, The Wet Seal reported 9 per cent drop, bigger than the expected 7.7 per cent decline.

Not everyone had disappointing results.

Strong performances at Ross and The TJX Cos., which operates Marshalls, T.J. Maxx and Home Goods, underscored that shoppers' have a strong appetite for brand names at bargain prices. Both Ross and TJX posted a 7 per cent gain in revenue and raised their profit outlook.

Luxury chains Nordstrom and Saks also fared well, easing fears that the affluent could pull back because of big swings in the stock market. Nordstrom notched an 8.1 per cent increase, up from the 5.3 per cent pace in May. Saks had a 6 per cent gain, up from a 4 per cent gain in May.