US consumer comeback remains work in progress

Agence France-Presse

Posted at Sep 06 2013 02:29 PM | Updated as of Sep 07 2013 01:29 AM

NEW YORK CITY - Recent US company earnings reports suggest the American consumer is beginning to boost spending a bit, but the comeback remains cautious and has not treated all retailers equally.

Home-improvement brands Home Depot and Lowe's were among the biggest winners, reporting hefty gains in sales thanks to the housing comeback. Meanwhile, department store operators Macy's and Walmart slashed their profit forecasts, complaining of tight-fisted consumers.

Teen retailers Abercrombie & Fitch and American Eagle slumped, while Dollar Tree and other names that serve lower-income consumers outperformed.

But even the winners in the most recent quarter described a finicky US consumer vigilant on price and discriminating when it comes to marketing.

Gap Inc., which owns the Gap, Banana Republic and Old Navy stores, posted a five-percent increase in same-store.

That counted as an especially fat increase among apparel retailers. But the company said there are periods where consumers simply stop spending.

"It's not uncommon for customers, for very little reason or any reason, to go into this hibernation," Gap chief executive Glenn Murphy said on a conference call.

"Whether that's for a month or whether that's for a quarter, that's just something we've become acclimatized to."

Upscale home furnishings chain Williams-Sonoma, another standout, boosted its 2013 profit forecasts on higher sales. But chief financial officer Julie Whalen said the retail environment remains "choppy."

"There are still questions, question marks surrounding the economy today," Whalen said.

Factors behind the continued consumer caution include higher payroll taxes, relatively high gasoline prices and an only modestly improving employment picture. On the flip side, some consumers are feeling more confident thanks to appreciating home values and higher stock prices.

One trend has been the consumer shift towards larger purchases. Evidence is the boom in auto sales, which in August accelerated to their best pace since October 2007.

Home Depot posted an 11.4 percent gain in comparable US store sales, including a solid nine percent gain in big-ticket transactions, those over $900.

Peter Keith, a senior research analyst at Piper Jaffray, said Home Depot and Lowe's were strong across product lines and US regions, suggesting some "sustainability" to the earnings growth.

"We have gone for several years of under-investment in the home, so this is effectively just a lot of pent-up demand that's getting released now that home prices are back to moving up year over year," Keith said.

"It's probably causing a wallet-share shift away from smaller-ticket discretionary items."

Macy's chief financial officer Karen Hoguet cited this shift as a factor in the company's 0.8 percent decline in comparable store sales.

Macy's plans to bump up its marketing budget and will stay "very sensitive to the fact that in this environment, price matters," Hoguet said.

Best Buy, which posted a 0.4 percent drop in comparable store sales, said it is lowering some prices to keep traffic high online and in stores.

"We don't feel we need to be lower than the competition," said chief executive Hubert Joly. "We just don't want to be beat."

At teen retailer American Eagle, which suffered a seven-percent drop in comparable-store sales, executives are retooling designs to try to lure more customers with jazzier fashions.

"With high teen unemployment, there is intense promotional competition for every dollar," said American Eagle chief executive Robert Hanson. "We need to bring our 'A' game every day."

Dorothy Lakner, a retail analyst at Topeka Capital Markets, said that while there has been something of a shift towards bigger purchases, the success of Gap and some other apparel sellers indicates retail remains a company-by-company story.

"Some retailers have improved their product and customers are noticing and they're shopping at these places as opposed to other places," Lakner said.

One sub-sector that continues to thrive sells cleaning items and other consumables to a mainly lower-income cliental.

"We believe that our model is right for our times and our current economy," said Bob Sasser, chief executive of Dollar Tree, which has been opening new stores at a fast clip.

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