The year 2014 opened on a soft note for several U.S. retailers, given the not-so-convincing performance of the emerging economies and a severe winter that locked consumers indoors. However, following the weather improvement through the second half of February, businesses seemed to gather steam. U.S. retail sales, which account for a third of consumer spending, rose 1.5% in March (as stated by The US Census Bureau), as pent-up demand drove shoppers back to stores after a rebound from the winter freeze.
However, the encouraging trend did not last long as consumers constrained spending due to the weak start to the year. Retail sales barely rose in April and May and edged up just 0.5% in both the months, which signals that consumers were not ready to splurge on shopping. In June, U.S. retail sales increased less than expected with growth of just 0.2%.
However, we note that revenues improved in the months of April, May and June from the first the first three months of the year with improvement in weather conditions. This suggests that the second quarter results of the large retailers could be better than the first.
In fact, many economists expect better U.S. retail sales trends in the second half of the year based on favorable economic data and an improved consumer and business outlook. Per Reuters, improvement is seen in nearly all areas from employment to manufacturing, with recovering housing outlook after slumping in late 2013 following a run-up in mortgage rates.
According to data from the Bureau of Labor Statistics, the unemployment rate was almost the same at 6.2% in July, compared with 6.1% in June and 6.3% in May. The recent Conference Board’s data on Consumer Confidence Index reflected a 4.5 points improvement in July to 90.9, up from 86.4 in Jun 2014 and 82.2 in May.
Let us look at the sales trend of some retailers who are scheduled to report this week.
Wal-Mart Stores Inc. (WMT)
Though Wal-Mart does not report monthly sales like many of its counterparts, it should be noted that the retail giant has been posting negative comparable store sales for the last five quarters in a row. We expect weak traffic and do not expect to see much improvement in the upcoming second quarter fiscal 2014, as we believe shoppers are still spending cautiously.
However, as per Redbook Research’s latest reports, the second quarter fiscal 2014 results are expected to be relatively better than the preceding quarters as its sales largely depend on broader retail market trends.
Wal-Mart carries a Zacks Rank #3 (Hold) and is scheduled to report its second quarter fiscal 2014 results on Aug 14 before the market opens.
Macy’s Inc. (M)
Macy’s, one of the leading department store retailers, reported a sluggish first quarter, following an exceptionally difficult winter. Business trends were soft from January to March, with the exception of the Valentine’s Day shopping period. However, with sales trend improving in April with improving weather conditions, we believe the company is poised to do well in the second quarter.
Macy’s has also been taking steps such as integration of operations, consolidation of divisions as well as developing e-commerce business and online order fulfillment centers to increase sales, profitability and cash flows. Management is also optimistic about capturing sales opportunities with its fresh inventory along with My Macy's localization initiatives, omnichannel integration and Magic Selling. Macy’s carries a Zacks Rank #3 and is scheduled to report its second-quarter fiscal 2014 results on Aug 13 before the market opens.
Nordstrom Inc. (JWN)
Despite adverse weather conditions in the first quarter, this upscale department store operator registered improved comps driven by ongoing technological investment towards expanding online presence and enhancing merchandise offerings. However, the company believes the fiscal year 2014 will remain challenging due to a highly promotional environment. Nordstrom holds a Zacks Rank #4 (Sell) and is scheduled to report on Aug 14 after the market closes.
Kohl’s Corporation (KSS)
This specialty departmental store operator has also been posting sluggish sales results in the past few quarters owing to a tough retail environment and harsh weather conditions. Comps declined 3.4% in the last reported quarter, which compared unfavorably with a decline of 1.9% in the prior-year quarter and a 2% decline in the prior quarter. Some firms believe that comps should improve sequentially in the second quarter fiscal 2014 (scheduled to be reported on Aug 14 before the market opens) versus the first quarter, despite sluggish traffic. Kohl’s currently has a Zacks Rank #3.
Bottom-Line
With improving macro-economic environment, we can see growth in top-line in most of the retail stocks. However, the revenue growth is sluggish as consumers are gradually and cautiously spending. In fact, they are more interested in products carrying higher discounts, which in turn are harming the retailers. The extremely promotional retail environment is also pushing up competition among the retailers. We expect these headwinds to subside by the end of the year.
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