Can Retail’s Rally Keep It Up?

Q2 earnings were solid, but let's not get ahead of ourselves

   
Can Retail’s Rally Keep It Up?

As summer winds to a close along with earnings season, we can look back on the last few months and notice at least one thing: Shoppers seem to be getting a little more pep in their step.

All in all, the retail sector saw a pretty solid spree of earnings since reports starting rolling in. Kors (NYSE:KORS), Macy’s (NYSE:M) and Gap (NYSE:GPS) saw double-digit gains in earnings, for example, while big-box retailers Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) each saw steady growth in sales.

Plus, the SPDR S&P Retail ETF (NYSE:XRT) is in the black since second-quarter earnings season kicked off. And even the ugliest of all retail stocks — good old Abercrombie & Fitch (NYSE:ANF) — saw gains after tossing out Q2 numbers. ANF shares actually jumped double-digits following its report.

Really, the only glaring gripe in retail — besides a lowered outlook and slight sell-off for discounter Dollar Tree (NASDAQ:DLTR)  — would have to be Aeropostale (NYSE:ARO). The company’s drop in traffic led to a 98% fall in profit and a 10% slide for shares right after its earnings report.

But even that blow was lightened with more recent good news for retail. Consumer confidence rose unexpectedly in August, bringing it to the highest level since May. July retail sales improved for the first time in four months. And payroll numbers for July came in stronger than expected.

Not too shabby. Right?

Maybe. But sometimes, the best way to feel successful is to simply have low expectations — which could be exactly what’s happening now.

Just look at ANF’s “accomplishments” that caused its 10% jump: The company had a 4% rise in total sales that was accompanied by a double-digit fall in same-store sales (those at stores open one year or more) and a 50% drop in earnings. Abercrombie was thus able to exceed its already-lowered expectations and maintain its already-lowered full-year outlook.

That had investors cheering for the struggling chain — at least for a while — even after they shrugged off much more impressive numbers from value-oriented TJX (NYSE:TJX) and, once again, sent Dollar Tree into the red despite a pretty strong quarter.

But such cheering, and even naysaying for DLTR, was just a blip on the radar. ANF has lost around a quarter of its value year-to-date and has closed countless locations. TJX and DLTR are both up since January — 42% and 17%, respectively.

Really, this quarter hasn’t changed much at all.

Such a reality is a good lesson for all of retail: Just as we can’t overemphasize a single better-than-terrible report from a subpar stock like ANF, we also can’t overemphasize a few better-than-terrible signs from a struggling sector as a whole.

One good quarter for retail doesn’t mean things are necessarily going to stay that way. The July unemployment report, for one, showed that 44 states saw jobless claims increase, bringing the rate to a five-month high. And while the July Consumer Price Index remained flat — gas prices and food prices alike are, or soon will be, on the rise.

The bottom line is that the U.S. economy is still far from fully recovered. Even with a boost from back-to-school sales, it will take a lot more strong quarters for all the rah-rah about retail to be justified.

Buy, hey, let’s not get too down about things: A small step in the right direction is still a step. And getting things back on track — in retail and across the board — has to start somewhere.

As of writing this, Alyssa Oursler did not own a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/08/can-retails-rally-keep-it-up/.

©2014 InvestorPlace Media, LLC

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