Back-to-school boost for retailers

Analysis |

A strong back-to-school shopping season helped retailers beat analysts' expectations for August sales, raising hopes that Americans will keep spending. Still, analysts remain cautious amid high gasoline prices and declining home values in many areas.

Consumer spending accounts for more than two-thirds of U.S. economic growth. The August-to-September back-to-school period sets the tone for the crucial holiday season, when retailers make up to half of their annual revenue. "Wall Street has already written off the consumer, which may be a mistake," notes Deutsche Bank analyst William Dreher Jr. Target (TGT), which reported better-than-expected August results, is among his top picks.

For department stores, August and September same-store sales have a 91 percent correlation with fourth-quarter results, according to Bear Stearns analyst Christine Augustine. The correlation is slightly weaker for discounters (86 percent) and teen retailers (84 percent).

Stronger traffic and demand buoyed same-store sales for retailers from discounter Wal-Mart Stores to preppy Abercrombie & Fitch to upscale Saks and Nordstrom. Results from warehouse-store chain Costco, reported Wednesday, disappointed analysts, however.

Same-store sales allow for year-to-year comparisons, unlike sales at new stores. Thomson Financial's Same Store Sales index rose 3.1 percent last month, down from 3.9 percent in August 2006. The index, though, topped analysts' expectations of 2.5 percent growth.

Among 45 retailers, two-thirds beat expectations. That suggests "the consumer is still engaged," says Thomson Financial analyst Jharonne Martis.

The August results got a boost from several special factors. Later back-to-school dates in several districts pushed sales into August from July, while cool weather helped fall fashion sales. Strong employment and income trends have lifted consumer spending. Analysts are looking for the U.S. government to report next week that overall retail sales grew 0.2 percent last month. That would be down slightly from 0.3 percent in July.