June Sales Wilt in the Heat

It's going to be a long, sweltering summer for retailers and their investors. June's retail comps data is hot off the presses, and investors should resist any urge to get too excited. The specter of profit-shrinking price cuts hangs over this data.

We've seen plenty of signs that consumers aren't quite as recovered as everybody hoped. Much like May sales, June's results didn't really offer any logical reason to ramp up the optimism. According to Thomson Reuters, retail same-store sales rose 3.1%, which just barely missed analysts' expectations for a 3.2% increase.

The incredible disappearing consumer
Let's take a look at a few major retailers' sales data.

Company

June Comps

June Net Sales

Costco (Nasdaq: COST  )

4%

7%

Gap (NYSE: GPS  )

0%

1.6%

Target (NYSE: TGT  )

1.7%

4%

Abercrombie & Fitch (NYSE: ANF  )

9%

23%

Hot Topic (Nasdaq: HOTT  )

(2.1%)

(0.8%)

Buckle (NYSE: BKE  )

(7.3%)

(2.4%)

Nordstrom (NYSE: JWN  )

14.1%

19.8%

*All data from company press releases.

Investors should take the numbers with a grain of salt, since a highly promotional environment made some of the sales look more impressive than they really were. In truth, drumming up customer traffic was a challenge. In fact, Gap's lackluster tidings included a comment from CFO Sabrina Simmons describing June as "a difficult month with lighter traffic" than the retailer had expected.

A few of these companies' results may be skewed by historical performance, too. For example, Abercrombie & Fitch's sales and comps have been flagging for quite a long time, so its seemingly impressive showing is a bit deceiving given its 32% decline in June 2009 comps. In an uncharacteristic move, Abercrombie moved merchandise with sales in June. The same story goes for luxury retailer Nordstrom.

Conversely, Buckle's operational performance has been stellar for a long time, so its seemingly ugly June figures reflect that at some point, its momentum has to slow down. Now also seems like a great time for investors to think about buying Buckle shares. After a 10% drop today, Buckle remains a reasonably priced stock with a forward P/E of 10.

Tough times ahead
This year, gauging the sustainability of any signs of consumer recovery has proved crucial for investors. Early positive signs of recovery could stall; unemployment remains stubbornly high, and the housing market is still beleaguered.

Retailers have their work cut out for them to lure in still-cautious and budget-conscious consumers. Massive markdowns gin up sales, but hurt profitability -- and the need for desperate markdowns doesn't signal a healthy retail sector overall. Retailers will have to tread a careful tightrope to offer the right mix of merchandise at the right price, without cutting too deeply into their bottom lines?

Do you have any favorite retail stocks, or are you staying away from the whole sector? Share your thoughts about the retail landscape and the state of consumers in the comment box below.

Costco is a Motley Fool Inside Value recommendation and a Motley Fool Stock Advisor choice. The Fool owns shares of Costco. Try any of our Foolish newsletters free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


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