2nd UPDATE: Retailers Report Tepid Sales Growth In July

Hot weather and a cooler economy kept buying relatively tepid in July, despite major markdowns that retailers used to cajole customers into stores.

The month was choppy in terms of customer traffic and the impact that discounts had on retailers' results. Stores such as Macy's Inc. (M), Limited Inc. (LTD) and Abercrombie & Fitch Inc. (ANF) greatly exceeded expectations, while J.C. Penney Co. (JCP), Aeropostale Inc. (ARO) and Hott Topic Inc. (HOTT) widely missed the mark and provided discouraging earnings forecasts.

"Some very clear lines are being drawn," said Brian Sozzi, retail analyst at Wall Street Strategies. "If you were a teen apparel retailer, promotions absolutely hurt comps and second-quarter earnings in certain cases. But in the overall picture, there are pockets of strength."

The 28 retailers followed by Thomson Reuters reported same-store sales growth of 2.9% in July, below the 3.1% increase that analysts were expecting. The July figure compares with a 5.1% drop a year ago and a 3.1% increase in June. The nation's largest retailer, Wal-Mart Stores Inc. (WMT), doesn't report sales on a monthly basis.

Many retailers used the period to clear out summerwear in anticipation of the back-to-school buying season, but customers did not respond robustly in many cases. Department stores and teen retailers missed expectations by the widest margins and had some of the biggest promotions.

J.C. Penney, whose same-store sales fell 0.6% when a 3.4% gain was expected, said it sold clearance inventory generally at "sharper price points," or more deeply marked down than a year ago. The retailer added that customers are "continuing their pattern of shopping closer to [their] needs." Penney now sees its second-quarter earnings at the lower end of its initial per-share estimated range of 5 cents to 8 cents.

Target Corp. (TGT) posted a same-store sales gain of 2%, below expectations for a 2.3% gain. The low-priced merchant cited weakness in electronics, video games, music and movies.

Still, even some retailers that did well, did so at a cost. Gap Inc. (GPS) beat expectations but offered a second-quarter earnings estimate that was below analysts' expectations, suggesting that promotions prevented fewer dollars from reaching the bottom line.

In addition, Penney and Aeropostale both said their second-quarter earnings would be at the low end of the companies' previous forecasts. Aeropostale, on a conference call, talked about a "challenging retail environment."

Other teen retailers also had a rough July. Buckle Inc. (BKE), Hot Topic and Wet Seal Inc. (WTSLA) reported the biggest declines in July same-store sales, according to Thomson Reuters. Hot Topic also widened its loss estimate for the second quarter to 14 cents a share, after initially projecting a per-share loss of 7 cents to 10 cents.

Results from fellow teen retailer Zumiez Inc. (ZUMZ), however, topped analysts' projections for the seventh time in eight months, with same-store sales rising 9.4% when an 8.5% increase was expected. Also, Abercrombie & Fitch said July comparable-store sales rose 7%, when a 4.1% increase was expected, as products were widely marked down.

Costco Wholesale Corp. (COST), which has been building momentum, posted a 6% rise in same-store sales, ahead of the 5.5% gain that was expected. Higher gasoline prices and strengthening foreign currencies helped the warehouse club. The retailer also noted that same-store sales for its "softlines" category, which includes jewelry and home furnishings, increased 10%.

Limited posted one of the biggest early upside surprises, with same-store sales rising 12%, when 5.2% was projected. The operator of Victoria's Secret and Bath & Body Works also raised per-share earnings expectations to between 34 cents and 36 cents, after initially projecting a range of 27 cents to 32 cents.

The industry is dealing with an economy whose recovery has considerably tapered off as housing is still in a stall and unemployment remains high. Hopes that some back-to-school selling could help July sales were largely quashed by the hot weather that plagued parts of the country, keeping thoughts of fall at bay.

The back-to-school shopping period, which generally begins in late July and lasts until around Labor Day, is the second-biggest buying season of the year behind the Christmas holiday.

"We don't see consumers opening their wallets in any more than a tepid way," said John Long, retail strategist at Kurt Salmon Associates. "There has not been positive movement by key economic gauges."

It does not get easier for retailers. After July, they face their toughest comparisons of the year, with August 2009's same-store sales having shown a small drop and the group reporting monthly gains for the rest of last year.

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

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