June Retail Sales Forecast to Rise With the Mercury

June Retail Sales Forecast to Rise
June Retail Sales Forecast to Rise

The East Coast heat wave is warming up more than sidewalks: It's also helping retailers shake up sales. Merchants are expected to report healthy numbers when they post their June sales figures Thursday, and several could update their second-quarter guidance as a result.

According to a tally by the International Council of Shopping Centers, sales picked up at the end of June, after a sluggish start to the month. The heat helped spur sales during the Fourth of July sales, noted ICSC chief economist Michael Niemira, putting June totals on track to show gains of 3% to 4% above last year's numbers "with bias towards a stronger performance for the month."

An estimate from Thomson Reuters projects the largest national retailers will post an average 3.5% increase in sales. Department stores are predicted to show the most improvement, up 5%, while drug stores, whose sales held up well through the recession, are anticipated to have increased only 0.5%. Thomson Reuters singled out Nordstrom (JWN) and Kohl's (KSS) among the department stores showing the best comparable sales for stores open at least a year, while Aeropostale (ARO) is expected to do best among the teen apparel merchants.

Teen merchants, which Thomson Reuters projects will report 2.5% growth in sales, are a good barometer for discretionary spending. Warm weather is driving strong sales of seasonal clothing such as tank tops and shorts, so retailers are in a good position going into the key back-to-school season, which is only second in sales to the winter holidays, according to the report.

Renewed Optimism After Cautious Guidance

Thomson Reuters estimates that comparable sales for the second quarter will rise about 4.2% by the end of July, a healthy gain over the same period last year. Its analysts note that, despite the recent drop in consumer confidence, unemployment dropped to 9.5% from 9.7% in June, which bodes well for the back-to-school shopping season.

"Despite the condition of the economy, BTS happens every year and parents are budgeted for it," says the report.

Merchants had been managing expectations early in the quarter, when shoppers' desire to spend seemed to cool off along with the weather in May. Analysts noted that rising costs are beginning to factor more strongly into retailers' results: Materials and labor costs are rising in Asia at the same time as merchants are restocking after a period of lean inventories.

That led many retailers to give what Wall Street observers thought was overly cautious guidance for the second half of the year. Many retailers countered that, given their need to replenish inventory and add staff after a period of cutbacks, their profits will depend on driving sales, a tough job while shoppers remain picky.

Improved Outlook for Hardware, Electronics
, Department Stores

Credit Suisse First Boston retail analyst Michael Exstein noted that retailers are working harder to spur sales, either with added advertising or promotions. But he also said in a report that sales expectations are moderate, which could lead to "a few upside surprises this month." June is always an important month during the second quarter, but this year it will be more important due to the late Memorial Day, which shifted totals from the holiday sales from May into June. Exstein estimated the shift will add one to four percentage points to the month's sales numbers.

Exstein expects several retailers, including J.C. Penney Co. (JCP), Macy's (M), Target Corp. (TGT) and Kohl's, to update 2010 earnings targets during their sales announcements. He favors discounters such as Family Dollar (FDO), Costco (COST) and Target, but also noted that department store stocks have declined enough that "we think certain names may deserve a second look heading into the back half of the year. "

Credit Suisse's Gary Balter, singled out Bed Bath & Beyond (BBBY), Lowe's (LOW) and Best Buy (BBY), pointing out that housewares and electronics merchants have developed strong cash flow and balance sheets during the recent downturn, and some have started or expanded share buybacks.

Most retailers won't report second-quarter results until mid-August, meaning the June report will be the earliest gauge on the second quarter and a bellwether for the back-to-school season. So expect retail stocks to have an active day on Thursday -- maybe even a good run.