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Retailers report solid sales gains for July

Discounts, heat drove shoppers to air conditioned malls

NEW YORK — Many U.S. retailers posted solid sales in July as deep discounts and sweltering heat drove shoppers to air conditioned malls. But analysts worry that momentum won’t continue through the back-to-school shopping season.

Despite a flow of bad economic news that kept consumer confidence shaky, a wide range of merchants that reported their sales results for July on Thursday delivered results that beat Wall Street estimates, including Limited Brands Inc., Costco Wholesale Corp. and Target Corp.

While the numbers signal a strong start to the back-to-school shopping period, roughly between mid-July through September, there are concerns that shoppers will soon return to their habits of the Great Recession by focusing on necessities and waiting for ever bigger discounts. That could be a big problem for retailers during what is typically the second-biggest shopping period of the year because many will be raising prices in order to deal with rising fuel, labor and other production costs.

“Early going, July looks like it’s shaping up to be a solid month despite all the economic headwinds,” said Ken Perkins, president of RetailMetrics LLC., a research firm. “But the concern is whether shoppers will buy back-to-school items at full price.”

The Great Recession may have officially ended in June 2009, but shoppers, particularly in the low-to-middle income bracket, still feel like they’re in a recession. For most, wage gains haven’t kept pace with higher household costs like food, and gas, which is $1 more per gallon than a year ago. This fall, shoppers are also facing higher price tags of fashion and accessories as retailers try to offset higher labor costs in China and soaring prices of raw materials like cotton. Home values remain depressed, and now companies, worried about the economy, are pulling back on hiring.

In this environment, wholesale club operators like Costco, which sell items in bulk, are expected to fare well for the back-to-school season. Costco’s revenue from stores open at least a year climbed 10 percent in July. Analysts surveyed by Thomson Reuters predicted the figure would rise 8.6 percent for the warehouse club operator.

The company had its strongest performance overseas, with international revenue at stores open at least a year up 22 percent. In the U.S., the metric climbed 6 percent. Removing gas price inflation and stronger foreign currencies, revenue at stores open at least a year gained 5 percent for the month.

Target also did well in July. The company said revenue at stores opened at least a year rose 4.1 percent in July as shoppers picked up more groceries and health and beauty products. Target said shoppers spent more per transaction and it expects the key revenue measure to rise in the low- to mid-single digits in August. Target said that shoppers spent more per transaction and back-to-school sales are off to “a solid start.”

Some specialty retailers also reported solid results. Limited Brands had a 9 percent revenue gain, well above the 4.2 percent estimate from Thomson Reuters. And teen retailer Wet Seal posted a 7.4 percent gain revenue at stores opened at least a year, beating forecasts for a 3.3 percent gain.

“We are encouraged by our July sales results as we begin the back-to-school season,” said Susan McGalla, chief executive officer of The Wet Seal in a statement.

The hope is that the momentum will continue into August, with shoppers picking up a few fall items at full price while they throw in summer bargains into their carts. That will help merchants get a “legs-up” on which items to re-order later in the year, says Stifel Nicolaus analyst Richard Jaffe.

But with rising worries about a faltering economy, the cold reality is shoppers are more likely to wait to buy back-to-school items until they’re steeply marked down or when they need them. Surveys from the National Retail Federation, Deloitte L.L.P. and other groups show that customers plan to buy only what the family needs, focus on fat discounts and reuse last year’s items.

“It’s going to be tough for retailers to succeed because of the economic uncertainty,” Jaffe said.

Despite a deteriorating economic picture in recent weeks, analysts and retail trade groups are sticking to their back-to-school growth forecasts ranging from unchanged to 3 percent compared with a year ago. The National Retail Federation expects families to spend $603.63 on back-to-school items, from clothing to supplies, down a tad from last year’s $606.40. The season accounts for 16.1 percent of annual retailers’ revenues, according to the International Council of Shopping Centers. It’s considered the second most important selling season behind Christmas.

But not every retailer reported strong July results. Gap announced a 5 percent drop in revenue at stores opened at least a year, worse than the 0.7 percent decline that analysts had expected. Its names sake division, Old Navy and Banana Republic as well as its overseas business all posted drops. Still, the retailer offered a profit outlook that was above Wall Street estimates because of improvements in inventory.