Fourth-Quarter Retail Earnings: Can the Uptrend Continue?

Christmas shopping for bargains
Christmas shopping for bargains

As retailers start releasing their latest quarterly earnings this week, don't expect too many fireworks. After a holiday season that marked a return to some form of normalcy, merchants are bracing for a year of mild sales growth and more stable operations.

Consumers are spending again, but still shopping carefully, as the major merchants' January sales reports showed earlier this month. Tuesday's release of Commerce Department retail numbers for January will likely underline that dynamic, just as merchants begin reporting fourth-quarter and fiscal-year earnings. The Commerce numbers are the most complete picture of retail because they include gas, food and auto sales, as well as the results of Walmart (WMT), the world's largest retailer (which doesn't publicly report monthly sales).

"We're not completely out of the woods, particularly for housing-related spending, but I think retail has largely recovered from the 2008 recession," says Kamalesh Rao, director of economic research for MasterCard Advisors SpendingPulse.

"A Good Sign"

According to SpendingPulse numbers, which tend to mirror the Commerce Department tally, January sales excluding autos and gasoline were up 4.6% over January 2010, the best yearly increase since April 2010. The growth rate for the three-month period was 4.9% above the year-ago period, the best quarterly growth since August 2007, according to SpendingPulse, which tallies sales by payment forms including credit, cash and check.

"I think we've finally managed to dig ourselves out of that trough in the recession," says Rao.

"A lot of the momentum we generated through the holiday season seems to have sustained itself. That's a good sign for consumer spending," he says. Sales in January were up 1.8% over December, reversing a slowdown in month-over-month growth, which indicates sales momentum gathered steam despite the inclement weather last month, notes Rao.

"Singles and Doubles"

Whether that momentum holds is an open question, given the state of the housing and job markets, say industry observers. As the retail earnings season begins, analysts note that merchants will have to focus more on holding down costs and operating more efficiently, rather than look for sales increases to boost profits.

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"This year will be characterized not by home runs, but by singles and doubles," said Credit Suisse analyst Gary Balter in a note to investors. He said the stock prices of mall anchor stores had gone up 40.5% in 2010 after rising 228.3% in 2009, but that pace can't hold up for a third year. Comparisons will be harder this year, with gross margins having made it back to their pre-recession peaks, he wrote.

Mass merchants are under pressure from rising costs for goods, higher energy prices and price-sensitive consumers who are comparison-shopping more aggressively online, Balter explained. He recommended mass retailers such as Family Dollar Stores (FDO) and Costco (COST) that offer shoppers something beyond low prices, over retailers such as Walmart that are focused more narrowly on prices.

As the merchants report earnings, analysts will likely want some forecasts for spring sales -- especially the key Easter sales period -- as a gauge of consumer activity. Major retailers were tight-lipped when reporting January sales, even as several upgraded their guidance for fourth-quarter earnings.

"Even though we're talking about a rebound and pretty sustained momentum, we're still talking about a consumer that's far more selective and far more choosy than they were pre-recession," says Rao. "The sustainability of momentum is a question mark right now, but we have good signs."

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