Retail Looks Healthy Now, but Wait Till the Holidays

With more than 26,000 retail jobs added last month, it's no wonder July retail sales exceeded expectations in both high- and lower-end stores. But retail experts warn that the next few months could take a turn for the worse as the holiday shopping season kicks in.

Retailers' sales at stores open at least a year were up 4.6% in July, according to a tally of 27 major retail chain stores from the International Council of Shopping Centers.

"A lot of the trends that have been in place continued through July. Spending and sales continued to be relatively strong," said Michael Niemira, chief economist at the ICSC.

July's sales spike isn't as impressive as June's 6.9% increase, but June data was "abnormally strong," he noted.

"It's really a stock picker's world now more than ever, because you look at broad retail trends and say they are pretty good, then you look underneath it. It's driven by a few key players, while others are far more choppy," he said.

The luxury-store segment, which draws customers during the dog days of summer by slashing price tags on designer duds, was led by Saks (NYSE: SKS) and its whopping 15.6% increase during the month, while Neiman Marcus edged up 7.7%.

Wholesale giant Costco Wholesale (Nasdaq: COST  ) reported a 10% boost in same-store sales in July, trailed by a 9.2% gain of its bulk competitor BJ's Wholesale Club (NYSE: BJ  ) .

Discount retailer Target (NYSE: TGT  ) benefited from its new grocery segment and a strong back-to-school sales start, posting a 4.1% gain.

Dillard's (NYSE: DDS  )  led the department-store pack with a 9% gain, while Macy's (NYSE: M  ) edged up 5%and J.C. Penney (NYSE: JCP  ) was up 3.3% in July.

Not all retailers fared well in July, with Kohl's reporting a 4.6% drop in same-store sales, and Gap's subpar performance resulted in a 5% fall.

"Numbers are still relatively good. Looking forward, we worry," he said. "It's a tale of two cities. When you look right now everything looks fine. When you look out three to six months, that's when you start to worry. Things can change between now and then. Leading indicators aren't flashing good signs."

Those indicators include U.S. GDP growth and employment, which are slowing because demand for U.S.-made goods and services is weak, he says.

"Without stronger income or services, we are not going to get stronger growth," he said. "The worry then is the backdrop of things, that it's deteriorating from here."

Moving into the holiday season, if clothes -- which are starting to reflect higher apparel costs -- aren't clearing off racks and being purchased at registers, then there's cause to fret.

"That can easily create a situation where inventory is too high, and the usual reaction is increased discounting and weaker retail profits," he said.

Time will tell what the back-to-school shopping season holds, which makes up a sixth of stores' annual sales. The National Retail Federation anticipates that families will drop an average of $603.63 on everything from backpacks to pencils this season, down slightly from $606.40 in 2010.

Although none of this may give you the itch to buy, it may be worthwhile to keep an eye on Target and the other companies in this sector. You can add any of these stocks to your Foolish watchlist by clicking the "+" icons above. Don't have a watchlist yet? Set one up today for free.

Fool contributor Tierney Plumb holds no positions in any of the stocks mentioned. The Motley Fool owns shares of Gap and Costco Wholesale. Motley Fool newsletter services have recommended buying shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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