July retail sales weaken as tax rebates dry up

By Nicole Maestri

NEW YORK (Reuters) - Retailers, including Wal-Mart Stores Inc and Target Corp, posted disappointing July sales results on Thursday as shoppers ran out of extra tax rebate cash, diminishing the outlook for the current back-to-school shopping season.

The sales results, along with cautious outlooks for August, left little hope that there would be a lasting boost from tax rebate checks to prop up consumers headed into the back half of the year and the all-important December holiday season.

"The stimulus (checks) really had a marginal effect at best and it has run its course and there's no carry-through," said Retail Metrics President Ken Perkins. "It's difficult to see where some sort of boost in spending is going to come from."

According to Retail Metrics, 54 percent of retailers reported July sales that missed expectations, with discount retailers showing the best relative performance of the group. Department stores fared the worst.

The Retail Metrics July same-store sales index rose 2.3 percent, down from a 2.9 percent increase in July a year ago and a 4 percent rise in June, when shoppers were flush with rebate cash.

Wal-Mart, the world's largest retailer, said July sales at U.S. stores open at least a year, or same-store sales, rose 3 percent, missing Wall Street expectations for a gain of 3.4 percent. Target's same-store sales fell 1.2 percent while Wall Street had forecast a decline of 0.3 percent.

"With the end of the stimulus checks, we know consumers are spending more cautiously, and we continue to see a pronounced paycheck cycle at the end of the month," said Eduardo Castro-Wright, head of Wal-Mart's U.S. operations.

Shares of Wal-Mart fell 5.5 percent, while Target fell 3.2 percent. The Standard & Poor's Retail Index fell 1.3 percent.

The back-to-school shopping season, the second-most-important season for U.S. retailers behind the December holidays, is under way. But in a sign that consumers continue to spend warily, Wal-Mart said it expects August same-store sales to rise a tepid 1 percent to 2 percent, while Target forecast a drop.

The International Council of Shopping Centers expects August same-store sales to rise 2 percent, after it had forecast a July gain of 2 percent to 3 percent.

"We're going to continue to be in this low-growth, Darwinian environment for retailers," said Eric Beder, retail analyst at Brean Murray, Carret & Co, adding: "We're not expecting the consumer ... to open up their wallets in a big way for the rest of 2008."

STICKING TO THE BASICS

Shoppers' ability to spend has been limited this year by soaring gasoline prices, a crumbling housing market, tighter credit and higher grocery bills.

The U.S. government distributed roughly $100 billion in tax rebates to consumers between late April and mid-July, hoping to kick-start the economy. But benefits from the checks were expected to be short-lived as consumers confront inflationary pressures and a weak job market.

U.S. consumer prices jumped at the sharpest rate in more than a quarter-century in June, according to government data released this week, while the unemployment rate hit a four-year high in July, the Labor Department said last week.