Healthier Retail Sales, but Will It Last?

Healthier retail sales so far this year have many stores raising their guidance for first-quarter earnings. This comes as retailers report modest April gains and counsel caution for May. Major retailers are scheduled to start reporting financial results starting next week.

Stores released April revenue figures today showing consumers kept their wallets open a crack even after finishing their Easter shopping. April sales at major retailers were up 0.5% in stores open at least a year, according to the monthly tally of comparable retail sales by Thomson Reuters.

That's a small number and 1.2 percentage points below what Thomson Reuters' analysts had predicted, but most retailers had expected sales to be flat to slightly down because of shift of Easter to Apr. 4 this year, compared to Apr. 12 in 2009. The holiday's full effect fell in March, when sales rose a better-than-expected 9.1%. The shift probably took three to five percentage points off the retail totals, estimates Wall Street Strategies retail analyst Brian Sozzi.

Consumers Remain Focused on Value

Most retailers and analysts are looking at the two months in tandem to get a better view. Thomson Reuters' analysis notes the March/April average was 4.8%, better than January's 3.3% and February's 4% growth rates, which hints that there's momentum in consumer spending. For April, the best performers were discounters, where sales went up 2.7%, while specialty apparel retailers were flat and department stores fell 1.8%.

Many retailers noted that consumers remain focused on value and average transaction prices remain modest. But traffic is increasing, by most accounts, and several retailers found April sales to be better than they had expected.

TJX Cos., (TJX) the parent of discounters TJ Maxx and Marshall's, said it now expects earnings to come in near the top of its previous estimate of 76 to 79 cents per share when it reports May 18. CEO Carol Meyrowitz said comparable sales for April, which were up 4%, were in the upper range of the company's expectations, and first-quarter numbers were up 9%, which shows accelerating sales.

Even Macy's (M) and J.C. Penney Co. (JCP), which had both upped their guidance during investor meetings in late April, hiked it again. Macy's comparable sales were up 1.1%, better than its flat expectations, and first-quarter sales were up 5.5%, better than the 5% it had forecast Apr. 27. The parent of Bloomingdale's now expects a profit of 2 to 4 cents per share when it reports first-quarter results May 12, better than the flat estimate it gave a week earlier.

Stronger Guidance, Despite Weaker April

Meanwhile, Penney's continued to post dropping sales, with a 3.3% decrease in comparable sales in April. For the first quarter, comparable sales climbed 1.3%. But the retailer said it improved its gross margins at a better rate than expected and updated its first-quarter guidance to call for earnings of 25 cents per share.

Indeed, several retailers had a first quarter that's good enough to raise their sights, despite weak April sales. Aeropostale's (ARO) comparable sales were down 5%, hurt by a difficult comparison to a 20% gain during the same period last year. The merchant also noted the Easter shift depressed sales. But for the quarter, comparable sales were up 8%, and Aeropostale hiked its guidance to call for first-quarter earnings of 46 cents per share, two cents better than its previous estimate.

Gap's (GPS) comparable sales were down 3% and dropped across all its chains, but first-quarter sales were slightly better than expected, gaining 4% and rising across all its brands as well. As a result, the parent of Old Navy and Banana Republic increased its first-quarter guidance to call for 43 to 44 cents earnings per share, better than the First Call estimate of 40 cents per share.

Impact From Late Memorial Day

Among the big-box stores, Target (TGT), had lower-than-expected sales in April, down 5.9%, but said its earnings won't fall short. Management noted sales for March and April combined were up 3% and are up 2.8% year-to-date. In a statement, CEO Gregg Steinhafel reaffirmed the company's first-quarter guidance of meeting or beating the 86 cent-per-share analysts' consensus. Rival Wal-Mart Stores (WMT), however, doesn't report monthly results.

Kohl's (KSS) also took a long view, after showing sales down 7.7% for the month but up 8.8% for March and April combined over the year-ago period and 7.4% for the quarter. It upgraded its guidance to earnings of 61 to 62 cents per share, up from its previous estimate of 55 to 57 cents per share.

But in the midst of all the upgrades and good news, retailers called for caution in reading May's results. Macy's and Costco (COST) both warned a late Memorial Day this year will depress May sales and boost June totals. Memorial Day falls on May 31 this year, a week later than in 2009.

That could be offset by increased spending on Mother's Day gifts this weekend. A survey from consulting firm Kantar Retail notes that the number of shoppers planning to spend more on gifts this year jumped to 57%, compared to 49% a year ago, while those planning to spend less dropped to 14%, from 20% in 2009.

Consumer Demand Rebound Not a Given

Analysts will also be listening for signs of caution among retailers during the coming earnings conference calls with investors. As Sozzi notes in a report, a consumer demand rebound isn't a given -- he says even averaging March and April, the specialty apparel stores barely reversed their sales losses of a year ago.

"There's a possibility that consumers have satiated their demand that was pent up and decide to save money for back to school and the holidays," he says, "especially considering they will be encountering higher prices."

After trimming inventories and costs all last year, stores are now faced with rebuilding stock and dealing with price inflation, so their cost-cutting ability is limited. And soon they'll have passed the anniversary of the worst of the recession, so they'll get no cover from easy sales comparisons. As they try to build profits by boosting sales, the battle for market share is on.