May Retail Sales Were Up, but Shoppers Remain Picky

The tug-of-war between careful consumers and anxious merchants continues as retailers closed the books on May with uninspiring -- but not unexpected -- gains. Merchants did their utmost to blame cold weather and a late Memorial Day, but the lackluster numbers showed shoppers are still not in a free-spending mood.

Major retailers reported a 2.5% increase in comparable sales -- for stores open at least a year -- according to a tally by Thomson Reuters. Nearly all merchants blamed the shift of Memorial Day to May 31 -- a week later than last year -- for bumping holiday sales to June. Macy's (M) CEO Terry Lundgren said in a statement the parent of Bloomingdale's would have seen comparable sales growth jump from 1.4% to 5% if the holiday had been factored in.

Foot Traffic Up, but Transactions Down

Many merchants reported traffic is up, but the dollar amounts of transactions are down, as customers keep holding back. Thomson Reuters noted one-third of the major retailers it follows fell short of even the modest expectations they had raised, including names such as Nordstrom (JWN) and J.C. Penney (JCP).

"We continue to experience volatility in the pace of economic recovery," said a statement by Target Corp. (TGT) CEO Gregg Steinhafel. The discounter admitted a 1.3% comparable sales increase was less than it had expected, and noted that its transactions were up 2%, but that was offset by smaller transaction size on average.

This is bad news for retailers, who are focused this year on the elusive "topline growth" -- or rising sales -- after occasionally surprising investors last year by cutting costs to make up for slow sales. Wall Street has become much more focused on growth this year, since most retailers are going to have to spend more on inventory, staffing and restarting store remodeling projects they had put off during the recession.

Is Weather Really to Blame?

Retailers did a thorough job of talking down expectations during their first-quarter reports in May, noted Brian Sozzi, retail analyst at Wall Street Strategies. In a note to investors he questioned whether retailers had lowered expectations enough, given the risk to profit margins from rising costs and a still-reluctant consumer.

"If the consumer was truly back, weather would be a non‐issue (you want the knit top, brave the weather)," he wrote. Shoppers may be saving up for back-to-school and holiday shopping, he theorized, and added that since no retailers dropped their earnings estimates for the second quarter, they may be "betting big on a June sales snap-back."

That's not a guarantee. Even as more stores report markdown activity is lower, shoppers don't look ready to give up and pay retail. Nordstrom, which fell short of expectations with a 3.7% comparable growth rate, blamed the shortfall on the late start of its semi-annual sale. It estimated that the start on May 26 -- compared to May 20 last year -- cut its comparable sales by 3.5 to four percentage points.

Retail Investors Largely Unfazed

Investors shook off those concerns and bid up most major retail stocks after the market opened. Companies that held up better during the recession, such as Costco Wholesale Corp. (COST) and Nordstrom, dropped after the market opened, but the majority of retail stocks rose, including sales laggards like Penney and Abercrombie & Fitch (ANF), whose comparable sales dropped 3%, but rose 2% at its flagship chain.

Just like the retailers, investors are betting that the momentum is up, in spite of blips caused by weather and holiday shifts. They're hoping the combined May-June period -- which will include many of the July 4 holiday sales -- will beat expectations, just like the March-April average did, after smoothing out the Easter shift.

Father's Day sales could be an early gauge for the period. Most surveys show shoppers plan to spend a bit more this year for the occasion. That matches the behavior we've seen since the holidays of spending slightly more on special events and holding the line on everyday non-essentials such as clothing and housewares. A survey from consulting firm Kantar Retail found the number of shoppers planning to spend less for the holiday dropped slightly, to 11% from 16% last year, and the percent planning to spend more rose to 6% from 4%. The National Retail Federation forecasts Father's Day spending will grow to $94.32 from $90.89 per person in 2009.

So it is possible the May-June period will surprise investors with some upside. But given how enthusiastic many have become about retail stocks in the past months, the upside could be limited. And investors don't want to pay full price any more than your average mall shopper.