Thu Aug 5, 2004
By Emily Kaiser

CHICAGO (Reuters) - Early back-to-school demand helped Wal-Mart Stores Inc. and other U.S. retailers meet muted July sales forecasts on Thursday, but clothing chains including Gap Inc. struggled to please fickle fashion-minded shoppers.

Overall, U.S. retailers rebounded from a disappointing June to show a 3.0 percent increase in July sales at stores open at least a year, according to research firm Thomson First Call.

The tally was slightly below forecasts for a 3.2 percent increase. Discount and department store chains performed better than expected but clothing stores missed their target.

In June, same-store sales rose just 2.8 percent, well short of expectations for a 4.2 percent increase.

With just three months left before the U.S. presidential election, analysts and politicians alike are watching consumer spending closely. Disappointing June retail sales raised concerns about the health of the U.S. economy, but auto sales recovered in July and analysts had widely expected retailers to show some improvement as well.

"It appears that the June swoon in consumer spending is behind us," said Bill Dreher, retail analyst with Deutsche Bank. "Consumer spending has stabilized, albeit at a lower rate than we saw a couple of months ago."

Wal-Mart and other chains had given cautious forecasts for July because last year's sales were inflated by child tax credits, making it harder for retailers to show year-over-year improvement. Retailers have also warned that steep gasoline prices are likely to curb consumer spending this summer.

Dreher said retailers were more focused on protecting profit this year after last summer's aggressive clearance sales left some chains with disappointing earnings.

"Second-quarter earnings should be robust," he said. Most U.S. retailers operate on a fiscal year that ends in January, and will report second-quarter earnings later this month.

CLOTHING STORES STRUGGLE

Among the biggest retailers, Target Corp., the second-largest U.S. discount chain, posted better-than-expected sales for the month, but Gap missed Wall Street expectations, and the apparel chain slashed its profit forecast.

The Standard & Poor's Retailing Index shed 1.8 percent to trade at 369.22 near midday on Thursday, with apparel chains Gap, AnnTaylor Stores Corp. and Talbots Inc. among the weakest retail stocks.

For August, retailers including Wal-Mart and Target again gave modest forecasts. Last year, August sales were up a strong 5.2 percent, helped by the child tax credits.

Wal-Mart said July same-store sales rose 3.2 percent, slightly better than Wall Street forecasts for 3.1 percent, but much of the strength came from the Sam's Club warehouse stores instead of its namesake discount stores, which account for the bulk of sales and profits.

The retailer said back-to-school sales were off to a good start, with bedding for college dorm rooms and clothing among the top-selling categories. Warmer July weather in parts of the United States also spurred sales of summer merchandise, which had been weak in June.

July is typically a month of clearance sales to make room for fall merchandise, and early back-to-school shopping. But clothing stores reported mixed July demand, particularly in the notoriously fickle teen-oriented market.

Analysts said stores that found the right mix of preppy clothes did well in July, while those that missed the fashion trends lost out.

Gap posted a surprising 5 percent drop in July same-store sales, well below Wall Street forecasts for a 0.9 percent increase. The largest U.S. apparel chain now expects second-quarter earnings in the range of 19 cents to 21 cents per share, below the Reuters Estimates consensus forecast of 28 cents per share.

Kohl's Corp. reported a worse-than-expected 4.2 percent decline in July same-store sales but raised its quarterly profit forecast. The retailer said store inventories were down sharply from a year earlier, leaving it with less merchandise on clearance racks and boosting profits.

Sears, Roebuck and Co., the largest U.S. department store chain, reported its fourth straight month of declining same-store sales as apparel demand remained weak.

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