Solid Sales Gains in July Raise Hope for Holiday Spending Boost

Many retailers posted solid sales during the kickoff to the back-to-school season as deep discounts and sweltering heat in July drove shoppers to air-conditioned malls. Back-to school shopping trends are an opportunity for retailers to gain insight into consumers' shopping habits heading into the holiday shopping season that starts on the day after Thanksgiving.

But many mall owners and tenants worry that momentum won't continue throughout the remainder of the second-biggest shopping period of the year. Despite a flow of bad economic news that kept consumer confidence shaky, a wide range of retailers that reported July sales delivered results that beat Wall Street estimates, including discounter Target, department store Macy's, and luxury chain Saks Fifth Avenue. The International Council of Shopping Centers' preliminary tally of retailers' sales at stores open at least a year—a key indicator of a retailer's health—was up 4.6 percent, a slower pace than June's 6.9 percent gain, but in line with forecasts.

While the numbers signal a strong start to the back-to-school shopping period, there are concerns that shoppers will soon return to their old recession habits by focusing on necessities and waiting for ever-bigger discounts. And that could be a big problem for retailers, which are raising prices in order to offset the rising fuel, labor, and other production costs.

“Early going, July looked like it was shaping up to be a solid month despite all the economic headwinds,” said Ken Perkins, president of RetailMetrics LLC, a research firm. But the concern is always whether shoppers will buy back-to-school items at full price, he noted.

The concern stems from the fact that while the recession officially ended in June 2009, many shoppers, particularly in the low- to middle-income bracket, feel as though it never ended. For many, wage gains haven't kept pace with higher household costs for food and gas, which is $1 more per gallon than a year ago. Home values remain depressed, and now companies, worried about the economy, are pulling back on hiring. Adding to that, this fall, shoppers will face higher price tags as retailers try to offset higher labor costs in China and prices of raw materials.

In this environment, retailers that cater to higher-income shoppers have fared the best. The biggest standouts have been luxury retailers like Saks, which had a 15.6 percent increase for the month. That was much higher than the 8.5 percent forecast for the luxury chain.

Wholesale club operator Costco, which sells items in bulk, has also managed to attract higher income shoppers and others who like the “treasure hunt” experience of its stores. The company, which is based in Issaquah, Wash., said revenue from stores open at least a year climbed 10 percent in July. Analysts surveyed by Thomson Reuters predicted the figure would rise 8.6 percent for the warehouse club operator.

Those catering to low- and middle-income shoppers have been hurt the most by the economic downturn. Still, many of those retailers posted sales gains during the month. Target, which has been beefing up its grocery business, said revenue at stores opened at least a year rose 4.1 percent in July as shoppers picked up more groceries and health and beauty products. However, a survey from the National Retail Federation shows that customers plan to buy only what the family needs, focus on fat discounts, and reuse last year's items.