Retail Results Run the Gamut

Nordstrom and other upscale retailers are chugging along, while lower-end chains such as Wal-Mart feel the impact of expensive gas

Major retailers reported widely disparate second-quarter results, suggesting that luxury or higher-end chains aren't suffering very much from concerns about high gas prices and a deflating housing market. Meanwhile, lower-end stores, led by Wal-Mart (WMT), aren't looking so hot.

Coming out strong, Nordstrom (JWN) reported a 20% increase in net earnings on a total sales rise of 7.8% for the second quarter. Categories that performed well for the upscale department store included intimate apparel, accessories, designer apparel, men's apparel, and cosmetics. Plus, it didn't have to resort to discounting. Pete Nordstrom, executive vice-president in charge of department stores, said Nordstrom consumers "are a little less impacted by the macro issues impacting the economy."

On Aug. 1, Coach (COH) bagged a 31% jump in fiscal-fourth-quarter profit on a 23% rise in sales. And in the specialty retail area, Limited Brands (LTD), purveyor of Victoria's Secret and Bath & Body Works, said earnings per share increased 40% in its second quarter from year-ago levels.

On the downside, Sears Holdings (SHLD), parent of big-box outlet K-Mart, managed to boost operating income despite a loss in sales year over year. And casual clothing retailer Gap (GPS) saw net earnings drop more than 50% year-over-year to $128 million as comparable-store sales fell 5%. "The second quarter was more challenging than we expected," said Gap CEO Paul Pressler in a conference call on Aug. 17. "While we are encouraged by improved performance at Banana Republic, business was tough at Gap and Old Navy as we cleared through summer product."


  With these retail numbers all over the place what can investors conclude about the economy? "Saleswise, we've seen some slowing but it hasn't been dramatic," says Peter Kretzmer, senior economist with Bank of America. While gas price spikes tend to result in spending drop-offs, overall the "economy has been enormously resilient and it hasn't led to a long-term decline in spending," he says.

Stores catering to less affluent customers may be in for a harder time. High gas prices "hurt Wal-Mart more than anybody," says George Whalin, CEO of Retail Management Consultants, as they force the mega-retailer's lower- and middle-income customers to think twice before taking a drive. Indeed, the company recently reported its first quarterly profit decline in 10 years (see, 8/16/06, "Wal-Mart, Home Depot Hit Potholes").

Yet retailers catering to middle-income shoppers—such as TJX (TJX), Kohl's (KSS), and J.C. Penney (JCP)—showed strong results for the second quarter (see, 8/18/06, "Kohl's and TJX: Money in the Middle").


  Of course, retailers aren't immune to an economic softening, but there is some positive data out there. After a decline in June, retail sales climbed 1.4% in July. So stores might not want to hit the panic button, at least as long as they're selling products people want to buy.

For high-end stores, the economy may be less of a drag. Whalin says wealthy Nordstrom customers can shrug off high gas prices. Even though "they complain about it, I don't think that consumer is being hurt," he says. And while many economists, including Kretzmer, believe a slowing real estate market could slow consumer spending, Whalin thinks the retailer's customers will be able to ignore it, especially those ones not looking to sell their house.

One red flag is that the stores themselves are exposed to many of the same pressures as consumers. Kretzmer says they may see margins "squeezed" amid higher energy and building material costs.

Whalin says for the real picture on the retail environment, it's a good idea to look at unemployment figures, which have been "historically low." With people working, the implication is that they are still willing to spend regardless of higher gas prices. That might ultimately spell bigger problems for struggling retailers such as Gap. Their problem of late, Whalin says, is that "their fashions aren't what people want to buy."

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