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Most retailers missed the estimates given by the street for their June same-store sales. High-end, value retailers, as well as off-price retailers did well, while mid-tier retailers experienced a considerable drop in sales. This is in line with expectations, because high-income individuals spent as per normal on high-end products, while people in the middle and lower income brackets were more discrete in their spending, and purchased more from discount stores like Ross stores (NASDAQ:ROST) and TJX Companies, Inc. (NYSE:TJX). This resulted in sales shifting from slightly costlier mid-tier retailers like Kohl's Corporation (NYSE:KSS) to off-price retailers.

Thomson Reuters keeps track of 18 retail chains. Together, these chains posted a 2.5% increase in same-store sales in June, which is lower than the 7.7% up performance shown last year in June 2011.

The following are some reasons why the stores faced this drop in sales:

  • Uncertainty about the European and Chinese economies, and high unemployment in the U.S., lead consumers into being cautious in their spending, even though gasoline prices declined for more than two months.
  • Warm weather that came earlier than expected this year may have prompted people to buy summer clothes earlier on. This led to consumers shopping earlier than June. A survey by the International Council of Shopping Centers and Goldman Sachs showed customer traffic slackened, with most consumers saying that they did not shop at all during the past week since late May.
  • Pre-holiday sales could be another reason. Last year, the 4th of July holiday fell on the first Monday of July, so consumers started buying earlier in June. This year, it fell on a Wednesday, and will likely contribute to July's sales figures. This might lead to a larger than last year July comparable store sale figure.

Store Sales

Reported increase in same store sales for June '12 vs. June '11

Wall street estimate of same store sales for June '12

Results for May 2012













Costco Wholesale Corp. (NASDAQ:COST) showed an increase of 3%, which misses the street's estimate of 3.7%. Kohl's fared even worse as comparable store sales dropped (-4.2%) more than the street's estimate of -3.2%. Saks Inc. (NYSE:SKS), a higher-end retailer, exceeded expectations and reported a 6% rise, while the projection was 4.7%.

Last year's June results were far better. Costco Wholesale Corp. had a 14% increase in same-store sales in June 2011. Saks Inc. faced comparable store growth of 12%, which is double what it achieved this year. KSS faced a 7.5% increase in the same month of 2011.

COST's results also reflect the foreign currency translation impact of the strengthening U.S. dollar, relative to the Canadian dollar and Mexican peso. Costco is also in the business of selling gasoline, and it normally charges lower than neighboring service stations. Sales at Costco benefit when gasoline prices rise, which was not the case earlier this year. Excluding the low gasoline prices and the foreign-currency translations, the June comparable store sales figure saw an increase of 5%.

Off-price retailers like TJX Cos. and Ross Stores Inc. , which sell name-brand products at a discount, were expected to outperform in June, and they did. ROST's same-store sales increased by 7%, compared with Wall Street estimates of 4.8%. Similarly, TJX's comparable sales were up 7% compared with an estimate of 4.2%.

Company Descriptions and Valuations

Costco Wholesale Corporation

Costco Wholesale Corp. runs membership (individual and business) warehouses in the U.S., Canada, Puerto Rico, Mexico, United Kingdom, Japan, Taiwan, Korea and Australia. It mainly offers private labels, as well as branded products, in different merchandise categories. COST purchases directly from manufacturers. The company's products include candy, snack foods, beverages, healthcare and beauty products, household and office supplies, electronics, hardware, sports equipment, toys, automotive supplies, jewelry, apparel, home furnishings, meat, bakery, gas stations, one-hour photos and pharmacy.

The company's competitors are Wal-Mart (NYSE:WMT), Target, Kohl's , Amazon (NASDAQ:AMZN), Home Depot (NYSE:HD), Office Depot (NASDAQ:ODP), Staples (NASDAQ:SPLS), Trader Joe's, Whole Foods (WFMI), Best Buy (NYSE:BBY) and Barnes & Noble (NYSE:BKS).

Quarterly revenue growth (YoY) for COST is 8.2%, while the next 5-year growth rate is 13.03%.

COST is trading at a premium to its competitors, with a forward P/E of 21.4x. Its shares are up 11% YTD.

Saks Incorporated

Saks Incorporated is a chain of higher-end department retail stores in the U.S. The brand names under SKS are Saks Fifth Avenue stores (SFA), Saks OFF 5TH stores along with SFA e-commerce business (Saks Direct). Its stores offer a variety of fashion apparel (from famous luxury brands as well), accessories, shoes, jewelry, cosmetics and gifts. SFA are primarily stores located in shopping destinations or upscale malls in different regions. SFA products can be bought online or through catalogs. OFF 5TH sells luxury apparels and accessories, and are located in upscale mixed-use and discount centers. Saks Direct carries luxury merchandise from both famous designers and new designers, complemented by select private brand offerings. As at January 28, 2012, the company had 46 SFA stores and 60 OFF 5TH stores.

Quarterly revenue growth (YoY) for SKS is 3.8%. The next 5-year growth rate for SKS is 16.6%.

SKS is trading at a forward P/E of 19.6x, and its shares are up 10% YTD.

Kohl's Corp.

Kohl's Corporation operates mid-tier department stores in the U.S. and offers apparel, shoes and accessories for the entire family; soft home products, such as sheets and pillows; and house ware from brands like Rock & Republic and Jennifer Lopez. As of May 10, 2012, it operates 1,134 stores in 49 states. The company also provides on-line shopping through its website, so that it can cater to people who prefer to shop using the internet.

Quarterly revenue growth (YoY) for KSS is 1.9%. The next 5-year growth rate is 14%.

Currently, KSS is trading at a forward P/E of 9x and its share price is down 3% YTD.

The reason for the drop in Kohl's share price was aggressive cost cutting in a bid to lure customers, which led to significantly lower gross profits. Kohl's posted a first-quarter profit of 63 cents per share, down from 69 cents per share from a year earlier. Kohl's expects its second-quarter profit to be in the lower end of 96 cents - $1.02 per share, compared with the market estimate of $0.96 per share.

Wal-Mart and ROST are our favorite consumer stocks. You can read our detailed analysis here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.