April Retail Sales Will Show Consumer Demand Springing Back

An early Easter may have stolen some April retail sales, but most major retailers still expect to report healthy numbers on Thursday. As they await retailers' earnings reports, analysts say the fundamental conditions are in place for consumers to spring back into action and unleash some of the pent-up demand left over from the recession.

Clothing, housewares and luxury goods are already seeing upswings. After a tough 18 months during which only discounters saw gains, most observers expect department and luxury stores, furniture and home improvement retailers and clothing chains will lead the charge in spring. They do caution, however, that a lot of the relative improvement they expect to see will be based on easy comparisons to the dark times of a year ago, and that factor will evaporate as the year goes on -- especially if the economic recovery doesn't keep pace.

Thomson Reuters analysts estimate the top retailers will post an average 1.6% increase in April sales over the last year, when they were down 2.7%. The increase will be modest, because Easter fell on April 4 this year, compared to April 12 in 2009. The large majority of the holiday's effect fell in March, when sales rose a better than expected 9.1%.

The International Council of Shopping Centers is holding to its sales forecast of flat to down 3%, even as April sales rebounded nicely, with an assist from warm weather in most of the country. After a streak of several weeks of consecutive growth, sales during the last week of April were down 0.4% from the week before in the ICSC's tally, but the organization's chief economist, Michael Niemira, noted that sales for the week ending May 1 were still 4.4% above a year ago.

"Customer traffic ... continued to show solid year-over-year gains at discounters, department stores and apparel stores," noted Niemira in his report.

The weather seemed to cooperate, at least during the last weekend of the month. Niemira quoted forecaster Weather Trends International, which noted weekend temperatures in the Northeast were near record highs in the 80s and low 90s, which drove sales of air conditioners, beverages, pool and garden supplies, and suncare products.

Consumers More Confident, But Still Bargain Hunting

In fact, after a yearlong stretch of spending primarily on necessities, shoppers appear to be indulging again in non-essentials like clothes and home decor this spring. A recent report from Credit Suisse analysts forecast jewelry and home categories will show continued improvement this year.

As many economic indicators rebound, consumers are beginning to feel confident enough to spend on things other than food, medicine and other necessities, say retail observers. A report from Thomson Reuters noted that even while unemployment is still high, the rate has stabilized at 9.7% from January through March and personal income is rising, so consumers feel more confident about spending and stores have grown savvier about attracting them with good deals. For example, the report noted teen apparel retailers -- whose sales are a good gauge of discretionary spending -- have shown three straight months of gains so far this year, after 18 months of losses.

As the retailers' earnings season kicks off next week, many companies have already updated their first-quarter guidance and some, such as Macy's (M) have also updated their full-year guidance based on better than expected sales results.

But many analysts warn retailers not to get too confident, because consumers are still value-driven and not ready to announce the ends of their personal recessions, no matter what the economic indicators say. The Thomson Reuters analysts noted indicators such as personal savings and credit rates appear to show shoppers are taking money from savings and credit to fund their shopping.

Department Stores May Face a Rough Second Half

Analysts also note that despite the ravages of the recession, the retail sector is still carrying more stores than it needs. Credit Suisse warned that there may still be too many department store locations for the sector to support, because there weren't significant store closings in 2008 and 2009. Also, the chains are targeting the same categories -- such as jewelry, shoes, cosmetics and junior apparel -- so competition could be tough in that area.

During Macy's investors meeting last week, CEO Terry Lundgren was clear that his stores plan to grow sales by taking them from rivals. A week earlier in his investors meeting, J.C. Penney (JCP) CEO Myron Ullman expressed similar feelings about his company's growth plans. So expect shoppers to benefit in the short term, as the stores attempt to lure them in with new merchandise and promotions.

Investors, however, may want to be a bit more cautious, as Credit Suisse warned. It noted that except for J.C. Penney, few retailers will have easy sales comparisons in the second half of 2010. Since most already wrung out all their profit margin improvement during the bad quarters of last year, they will depend on growing sales to boost profits for now on.

May sales are expected to be strong too, thanks to Mother's Day, which is expected to be better than last year. The National Retail Federation is projecting total spending of $14.6 billion on gifts, or $126.90 per person, a slight improvement over $123.89 last year. That makes it second only to the Christmas/Hanukkah/Kwanzaa combination, according to the NRF.

With two weekends of Mother's Day shopping during the month, May appears bound to show strong sales too, if the better than expected Easter sales figures are any indication. But as the retailers begin reporting first-quarter results, investors are bound to have some pointed questions about the early numbers for May.