Retail sales numbers issued Thursday by the International Council of Shopping Centers (ICSC), which tracks 22 retailers, reinforced what we’ve been saying for some time: the US economy continues to grow and the pace of expansion may even be accelerating, even in the face of domestic political uncertainty, concerns about a slowdown in Chinese growth, and a recession in the Eurozone. According to ICSC data, retail sales rose 4.1% for March, with strong growth across all segments. We think the strong March retail sales performance and improving employment trends bode well for the US economy as we head into the second quarter. Though we liked the underlying March performance, we’re not making any changes to our fair value estimates for any retailer at this time.
Macy’s (M), a company we’ve been bullish on for months, handily beat analysts’ expectations of roughly 5% same-store-sales growth in March, posting 7.3% sales expansion during the period. While some of this is likely due to the unseasonably warm March weather, we think Macy’s outperformance signals that its focus on regional specific orders is successfully fulfilling customer needs in various markets. Target (TGT) also saw same-store-sales surge 7.3%, as customers returned to the discounter in the month. The firm continues to experience strength from its REDcard offering and take share from traditional grocers and Wal-Mart (WMT) in certain markets.
Another strong performer in March was Gap (GPS), which posted an 8% rise in sales versus 5.4% expected by analysts. We think Gap’s recent focus on improving its product mix and bringing new fashions to market faster will help recover market share lost to H&M, Zara, and Forever 21 in the last several years. Kohl’s (KSS), which we think is undervalued, also posted decent sales numbers for the first time in recent memory. March same store sales grew 3.6% versus a fall of 6.5% in March 2011. Kohl’s caters to a lower-end, price sensitive customer that is disproportionately affected by high gas prices, so the firm’s ability to attract customers in spite of macroeconomic headwinds is quite impressive. On the other end of the spectrum, luxury retail also continues to show strength. Nordstrom (JWN), for example, saw same-store sales increase 8.6% in March (consensus expectations were at 5.8%), after posting very strong same store sales in the same period last year. We think Nordstrom is able to raise prices on its relatively price insensitive clientele, and the firm continues to deliver one of the best in-store shopping experiences in the United States, in our view.
There weren’t too many negative surprises in the March retail data, though Stein Mart (SMRT) and Buckle (BKE) fell short of consensus expectations. Stein Mart experienced a sales decline of 0.3% in March as the firm continues to lose market share to Marshall’s (TJX) and Ross Stores (ROST), as opposed to any general or broad-based weakness on the low-end of the consumer spectrum. Buckle still saw sales rise by 6.4% in the period, and we think the firm’s miss was more a function of consensus expectations being too high than any fundamental disappointment.
All things considered, we think the strong retail sales data in March reflect an improving domestic economy and not just a short-term boost caused by good weather. Though obstacles to growth still exist (namely rising crude oil prices, a fragile housing market, and elevated unemployment), we firmly believe that the US economy will continue to expand through the course of 2012 and remain one of the strongest markets in the world.
Discount Stores:
Costco Wholesale Corp. 6 pct
Target Corp. 7.3 pct
Fred’s Inc. No change
Department Stores:
Bon-Ton Stores Inc. -0.1 pct
Kohl’s Corp. 3.6 pct
Nordstrom Inc. 8.6 pct
Macy’s Inc. 7.3 pct
Saks Inc. 6.3 pct
Stage Stores Inc. 4.7 pct
Clothing Stores:
The Buckle Inc. 6.4 pct
Cato Corp. 5 pct
Gap Inc. 8 pct
Limited Brands Inc. 8 pct
Ross Stores Inc. 10 pct
Stein Mart Inc. -0.3 pct
TJX Cos. 10 pct
Wet Seal Inc. -7.8 pct
Zumiez Inc. 14.1 pct
Drugstores:
Rite Aid Corp. 3.6 pct
Walgreen Co. -6.8 pct
Source of retail sales data: Company data, Associated Press.