With a weak job market, signs of rising inventories and the shopping-intensive festive season still months away, U.S. retailers are bracing for a bland second quarter.
Quarterly earnings for the retail sector are expected to rise 8.8 percent in the quarter from a year ago, after jumping 12.2 percent in the first quarter when unseasonably warm weather and colorful clothes helped sales, according to Ken Perkins, president of research firm Retail Metrics.
Last year in the second quarter, earnings rose 8.2 percent, according to Perkins.
Analysts and investors are curbing their enthusiasm as the global economy seesaws and U.S. consumer confidence unexpectedly cooled in May, falling to the lowest level in four months, according to a report released on Tuesday. On Friday, the Labor Department reported that U.S. employers added only 69,000 jobs in May, well below expectations. That growth is the weakest in a year.
"The recovery just doesn't seem to have happened like we expected it to. But that said, we did have a good first quarter and I think for most of 2012 we'll see positive comparable store sales," said Mark Larson, global head of retail at corporate auditing firm KPMG KPMG.UL.
When the weather was warm and shoppers were feeling better, retailers took advantage and sold more at full price.
With Easter gone, they took to discounting again. On Thursday, many U.S. retailers reported stronger-than-expected sales for May, but shoppers were lured by bargains.
Meanwhile, companies like Tiffany & Co (TIF.N), Abercrombie & Fitch (ANF.N) and Ralph Lauren Corp (RL.N) have cited economic problems in Europe, while chains like Home Depot Inc (HD.N) said they saw some cooling in demand in April after a jump in home improvement projects earlier in the year because of a warm winter.
EYES ON COMPARABLE SALES
As economic indicators blow hot and cold, investors are looking at comparable sales trends to place their bets.
"I think if people stayed with companies that are posting positive comparable sales ... they are good," said Eric Kuby, chief investment officer at North Star Investment Management Corp in Chicago. Among the companies he likes are Lowe's Companies Inc (LOW.N), Home Depot and Target Corp (TGT.N). He also mentioned Internet shopping giant Amazon.com Inc. (AMZN.O).
U.S. home prices rose for the second month in a row in March and gains in some of the hardest hit areas suggested the improvement was becoming more broad-based, a potential boon for Lowe's and Home Depot.
Kuby was unfazed by weak demand forecasts from those two companies.
"I think they didn't want analysts to get overly optimistic and set the bar too high for the rest of the year. People are spending money on their houses and the economy is better than the headlines," he said.
GETTING GROOVE BACK
Investor Michael Bigger of trading firm Bigger Capital is betting on clothes and shoe companies like Guess Inc (GES.N), Abercrombie & Fitch (ANF.N) and Skechers USA Inc (SKX.N). "Skechers is now starting to get its groove back. My picks are very company-specific," he said.
Both Kuby and Bigger said they are likely to stay away from traditional consumer electronics retailers. Companies like Best Buy Co Inc (BBY.N) have been in trouble for some time because of so-called showrooming, as shoppers tend to use its stores to check out gadgets and then order online from rivals like Amazon.
Best Buy is also dealing with a scandal related to ex-CEO Brian Dunn, who abruptly resigned from the top job during a probe that eventually found he had an improper relationship with a female employee.
"Their model does not seem to be working and there also does not seem to be any drivers to get people kicked about the sector right now. That struggle is likely to continue," Kuby said, referring to consumer electronics retailers. He added that related companies like video games maker Gamestop (GME.N) will also experience "real softness."
"The showrooming issue is a big problem in this sector and ... (will) continue to be an issue going into the next year," said Eric Anderson, professor of marketing at Northwestern University's Kellogg School of Management.
That is troubling, as 20 out of 36 retailers tracked across various sectors like clothes, electronics, drugstores and specialty retail have seen a rise in first-quarter inventories over the year, according to S&P Capital IQ.
This could add to the levels of discounting in the second quarter in domestic markets.
Tracy Travis, finance chief for Ralph Lauren, said on a call earlier this month that first-quarter trends at stores in the United States and Europe were challenging as customers continued to be somewhat restrained with their discretionary and luxury clothes shopping.
In contrast, off-price leader TJX Europe, a unit of TJX Companies Inc (TJX.N), posted its highest-ever first-quarter profit. Comparable sales increased 13 percent, signaling that shoppers were looking for inexpensive alternatives. TJX Europe operated 335 T.K. Maxx stores and 24 HomeSense stores as of April 28.
Given the need of retailers to plan ahead when ordering inventory, most of them are unable to react quickly if things suddenly go good or bad, said the Kellogg School of Management's Anderson.
"They've placed their bets already in terms of inventory, promotional plans. And they are still cautious. I think the second quarter will be relatively flat."
(Reporting by Nivedita Bhattacharjee in Chicago, additional reporting by Phil Wahba in New York; editing by Matthew Lewis)