US Retail Sales Expected To Show Solid Growth Despite Challenges

U.S. retail sales are expected to rise 4% this year, the best gain since 2006, despite heavy pressures from rising fabric costs and still-cautious consumers, the industry's biggest trade group said.

Since the retail industry has enjoyed virtually uninterrupted growth, the $2.47 trillion total sales for 2011 would represent a record and reflect a continuing recovery since sales dropped 2.7% in 2009 during the depths of the recession. The figures, from the National Retail Federation, don't include auto, gasoline and restaurant data.

Investors will get a feel for how retailers themselves are looking at the year when the biggest in the industry report fourth-quarter results next week and issue outlooks. Wal-Mart Stores Inc. (WMT), Target Corp. (TGT), Macy's Inc. (M), Sears Holdings Corp. (SHLD), J.C. Penney Co. (JCP) and Kohl's Corp. (KSS) are all scheduled to report their data.

While this year's projected retail-sales gain would be better than the 3% annual growth rate during the past decade and higher than last year's 3.7% growth, it is below the 5% rate that the NRF says reflects a strong economy.

The figures are arrived at by looking at various economic indicators that give a taste for consumer consumption as well as recent retail performance. The NRF's optimism is fueled by the retail industry coming off of seven straight months of sales growth, according to government figures. And holiday sales rose a "very healthy" 5.7%, the trade group said.

"Consumers have a lot of spending power that they have been sitting on, as evidenced in part by the strong holiday sales," said Scott Krugman, vice president at the NRF. Consumers should also have a bit more money on hand thanks to the Social Security tax cuts that began in January. On the higher end, the vastly improved stock market has spurred more buying.

Still there is a lot of pressure coming into 2011. Food inflation has already kicked in and gasoline prices continue climbing, matters that cannot be controlled by retailers. They are also trying to contend with industry-related matters like rising prices for cotton and other fabrics, and higher manufacturing and labor costs.

It is a tough job, though. Raw-material inflation is "extraordinary," said Tracey Travis, chief financial officer at Polo Ralph Lauren Corp. (RL) during the apparel company's third-quarter earnings conference call earlier this month.

Citigroup sees apparel costs rising 4% to 6% in the first half of this year, then jumping 13% to 15% in the second half, which will eat into profits to varying degrees and likely mean higher prices for customers in certain cases.

Retailers' game plans involve keeping price increases as low as possible and finding alternate and cheaper ways of making their goods without compromising quality. But even they do not yet know just how high prices will be going because conditions are still in flux.

"We're taking a stance that is almost week by week (regarding) what's happening as we are raising prices," said Michael Jefferies, chief executive of Abercrombie & Fitch Co. (ANF), earlier this week during the company's earnings call. "We're comfortable that we can pass some of these increases on to the customer. We're not comfortable with how much."

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

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