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Strong Retail Sales Jump-Start Economy

Posted on: Thursday, 7 August 2003, 06:00 CDT

The nation's retailers finally got a break in July as warm weather and heavy discounting lifted sales above expectations, even for struggling department stores.

The upbeat sales reports issued Thursday halted a sluggish trend seen since last summer and raised hopes that consumers will be in the mood to spend for the critical back-to-school season.

Sales picked up for most retailing sectors. Business was strong enough at Wal-Mart Stores Inc. that the industry leader boosted its profit outlook for the second quarter. Sears, Roebuck and Co., Target Corp., J.C. Penney Co. Inc., and Gap Inc. were among the retailers reporting sales that beat analyst forecasts.

Even May Department Stores Co. eked out an increase in sales at stores open at least a year, surpassing analysts' forecasts. Sales at stores open at least a year, known as same-store sales, are considered the best indicator of a retailer's health.

"It was a good month, and it may be a good omen for the second half," said Michael P. Niemira, vice president of Bank of Tokyo-Mitsubishi Ltd. "Sure, the month was promotional and weather helped, but this could be the start of a much better trend."

Bank of Tokyo-Mitsubishi's same-store sales tally of 77 retailers was up 4.3 percent, well above the 3 percent gain Niemira expected. That compares to a 2.6 percent increase in the year-ago period.

Niemira said the results outpaced the 1.7 percent monthly average gain during the January through June period, and was the best showing since June 2002, when the index posted a 5.1 percent increase.

The strong performance from retailers coincided with strong economic data from the government.

The Labor Department reported that productivity - the amount that an employee produces per hour of work - rose at an annual rate of 5.7 percent in the April to June quarter. That was the best performance since the third quarter of 2002.

The department also said new applications for jobless benefits slipped by a seasonally adjusted 3,000 to a six-month low of 390,000 for the work week ending Aug. 2.

July, when retailers step up discounting to clear out summer merchandise and make room for fall goods, is one of the least important months in the retail calendar. But analysts are hoping last month's results will be a precursor for a strong back-to-school season and robust economic recovery.

According to a recent National Retail Federation survey of almost 9,000 households, families with school-age children will spend an average of $450.76 on back-to-school items, up from $441.60 in 2002. Retailers are hoping the back-to-school season will get a lift from the $13 billion in tax credit checks being sent to more than 25 million families.

Wal-Mart, which along with other retailers struggled with cooler than normal temperatures in May and June, said same-store sales were up 4.6 percent in July, well past the 3.7 percent increase predicted by analysts surveyed by Thomson First Call.

Wal-Mart, which reported strong sales of food, electronics, swimwear and pet supplies, attributed the strong results to warm weather and clearance sales.

The discounter now expects earnings from continuing operations for the second quarter, ended July 31 to be around 52 cents per share. Analysts surveyed by Thomson First Call expected 50 cents per share. The retailer is slated to report earnings results on Wednesday.

Meanwhile, Target Corp. posted a same-store sales increase of 3.1 percent, besting the 2.1 percent gain analysts expected.

The struggling department store sector made a big improvement, posting a same-stores sales increase of 1.5 percent in July, the first gain and strongest sales pace for that segment since November 2001, according to Niemira.

Penney said same-store sales were up 3.7 percent for its department store business, beating Wall Street's projections of a 1 percent gain.

May said its same-store sales rose 1.8 percent. Analysts had expected a same-store sales decrease of 2.5 percent.

Sears, Roebuck and Co. reported a 0.8 percent decline in same-store sales, smaller than the 1.8 percent decline Wall Street forecast.

Federated Department Stores Inc., which operates stores including Bloomingdale's and Macy's, did not fare as well, reporting same-store sales that decreased 0.4 percent. Still, Federated's same-store results beat analysts' projections for a 1.1 percent decline. And the company, buoyed by leaner inventory and improved sales, increased its earnings forecast to between 60 and 63 cents for the second quarter. Analysts were predicting 54 cents per share.

Gap, continuing its turnaround, reported same-store sales increase of 9 percent, above Wall Street forecasts.

The company said back-to-school sales should benefit from the fall ad campaign starring Madonna and rap star Missy Elliott.

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