2nd UPDATE: Retailers Post Mixed Results; Promotions Help

U.S. retailers paid for their sales in June.

Dramatic markdowns helped stem shopper apathy and contributed to retail sales rising 3.1% in June, slightly below the expected 3.2% gain, according to Thomson Reuters. It was the strongest year-over-year growth since March, but discounting prices to increase sales pressures second-quarter earnings and raises questions about the strength of consumer spending.

"What you do in conditions like this is become extremely promotional to try and bring people in," said Chandi Neubauer, retail analyst at Majestic Research. "But clearing inventory comes at the expense of margin," or making money.

Big sales during June are common as retailers try to clear shelves for fall merchandise, especially back-to-school apparel, but last month's discounting was considered steep in an attempt to attract restrained consumers in a sluggish economy.

Abercrombie & Fitch Co. (ANF) posted one of the biggest comparable-store surprises, with 9% growth when 2.8% was expected, but the retailer personified promotion. Sales events at U.S. non-tourist stores "ran across all brands" during the month, with the average price down 16% quarter-to-date, the retailer said in a call.

American Eagle Outfitters Inc. (AEO) also significantly cut prices, saying the move spurred increased merchandise sales and transactions. Still, June sales were below its expectations, and "based on recent business trends and deeper promotions," the company said second-quarter earnings will be at the low end of guidance.

Another teen retailer, Aeropostale Inc. (ARO), also benefited from promotions. The store said that despite big markdowns, merchandise margins for the month continued to increase over last year and "both the level and composition of our inventories are well-positioned for the upcoming back-to-school selling season."

Still, Aeropostale did not lift guidance for the second quarter, which closes at the end of July for most retailers.

Some retailers that discounted in June expect to continue doing so. Gap Inc. (GPS) found its results "disappointing" as customer traffic was down at all three of its stores: the namesake unit, Old Navy and Banana Republic. "As a result, we'll likely experience some margin pressure in July as we clear remaining summer liable products in advance of fall," Gap said in a sales call.

Mass merchants posted mixed results. Target Corp. (TGT) failed to see much momentum, posting a 1.7% comparable-store sales gain in June when analysts expected a 2.7% advance.

"Sales in electronics, video games, music and movies were particularly soft for the month," said Target Chief Executive Gregg Steinhafel. As a result, Target "continues to plan our business cautiously" and projects July same-store sales to be up in the low single digits, Steinhafel said.

Other large retailers reported strong year-over-year results. Macy's Inc.'s (M) same-store sales rose 6.5%, J.C. Penney Co. (JCP) jumped 4.5% and Kohl's Corp. (KSS) increased 5.9%. Kohl's shares slid 4.1%, though, because Wall Street was expecting sales growth of 6.5%.

The nation's largest retailer, Wal-Mart Stores Inc. (WMT), no longer reports monthly sales.

Overall, though, retailers painted a muddy picture of consumer spending in June, using terms like "inconsistent," "choppy," and "uneven" buying behavior as unemployment remains high and new outfits just are not as much of a priority.

"We're almost treading water compared to the building spending momentum we saw at the beginning of the year," said Mike Berry, director of industry research at MasterCard Inc.'s Spending Pulse unit. "At the beginning of the year, people were anticipating good news and spending increased. When the economy didn't turn around, consumers took a step back."

-By Karen Talley, Dow Jones Newswires; 212-416-2196; karen.talley@dowjones.com

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