As the U.S. equity markets set new highs for the year, consumer confidence continues to show signs of stabilization. The Reuters/University of Michigan Surveys of Consumers said its preliminary index of consumer sentiment for September rose to 70.2, the highest since June, from 65.7 in August. This was above estimates expecting a reading of 67.3, and roughly back to the level of September 2008, which was 70.3.

Over 30 retailers reported monthly sales results for August over the past two days. While many areas of the economy have been showing relative improvement over the past few months, there have been few bright spots in retail. However, August results provide some hope that things are finally starting to turn around.

Overall sales at the 33 retailers we track decreased 0.4% to $30.054 Billion in August, while same-store sales declined 2.5%. Retailers have now seen same-store sales declines for 12 consecutive months. However, this was the least negative comp sales decline since April.

August ended with a whimper for retailers. For the third consecutive week, both ICSC and Redbook reported year-over-year declines in U.S. Chain Store Sales as back-to-school season failed to spur demand:

• The International Council of Shopping Centers [ICSC] reported that comparable same-store sales decreased 0.7% in the last week of August vs. a year ago, while same-store decreased 0.5% on a week-over week-basis. Commenting on the results, ICSC chief economist Michael P. Niemira said “Although the back-to-school calendar shifts will, on balance, boost year-over-year sales in August a tad, there was little discernible improvement in the trend during the entire month otherwise,” ICSC expects total sales for the month of August will be down between 3.5 to 4 percent.
• Redbook Research reported that retail same-store sales for the week ending Aug 29th declined 4.1% compared to the year-ago period, while sales for the first four weeks of August were down 0.6% from the same period last month, and 4.3% lower than last year. The firm added that consumer interest last week was on seasonal and back-to-school merchandise. It added that the sales declines are expected to continue, with preliminary targets for September of down 4% from last year and 1.5% from August. Note that Wal-Mart stopped reporting weekly and monthly sales figures in May of this year, and the substantial impact they had on the index is evident in the graph below.

By all accounts, back-to-school spending has so far been disappointing for most retailers. Early promotions, state tax holidays, and a late Labor Day were not enough to lure shoppers into increasing their spending in the month of August. Barring a last-minute splurge by consumers, don’t expect to see much improvement in September. We should start to see retailers improve their year-over-year figures starting in October, as most companies will be dealing with extremely weak comparable sales from last fall.

The National Restaurant Association said yesterday that the Restaurant Performance Index, a monthly composite index that tracks the health and outlook for the U.S. restaurant industry, improved slightly in July to 98.1, up 0.3% from its June level.

However, the index remained below the 100 level, which signifies contraction, for the 23rd consecutive month:

While we are only roughly half way through the back-to-school shopping season, investment bank Global Hunter Securities put out their early estimate of holiday retail sales yesterday. The company forecasts a range of a 1% increase to a 1% decrease from the year ago period, which showed a 7.6% decrease from 2007.

While it may seem that a flat year-over-year result would represent stabilization, keep in mind that the 2008 holiday season was truly dismal, as noted by the report:

Gap Inc. (GPS) put out two press releases yesterday, the first announcing their fiscal 2nd quarter earnings, and the second highlighting promotional events to celebrate the company’s 40th anniversary. The company is hoping that investors cheer the fact they were able to post earnings roughly in line with last year. If not, there will still be a celebration, as the Gap will be outfitting floor traders on the NY Stock Exchange with Gap jeans today, and hosting a nationwide simultaneous acoustic concert in its more than 700 stores tonight.

Gap reported a profit of $228 Million, or $0.33 diluted EPS, in the fiscal 2nd quarter. That was roughly in line with last year’s profit of $229 Million ($0.32 EPS), and slightly above analyst estimates for 32 cents per share. Net Sales in the quarter decreased by 7.3% to $3.25 Billion, while same-store sales declined 8% on top of a 10% drop a year ago. Comparable sales declined across all segments, with Gap NA -10% vs -6% last year, Banana Republic NA -15% vs -6%, Old Navy NA -4% vs -16%, and International -5% vs -6%. E-commerce continues to be the one bright spot for the company, as online sales grew 17% to $224 Million in the quarter.

With the majority of retail companies having reported fiscal 2nd quarter earnings by now, a picture is emerging of an industry continuing to struggle with a very weak consumer spending environment. Most retailers were able to beat earnings estimates through cost-cutting and inventory management initiatives, but top-line results have been soft as demand seems to have stabilized at a very low level.

Yesterday, KPMG released a survey titled “Surprising Majority of Retail Executives Expect Higher Revenue, Profitability, Improved Jobs Outlook in 2010.” Commenting on the results, Mark Larson, KPMG global retail sector chair, said “The KPMG survey findings reflected an expression of guarded optimism among retail executives, given the industry’s challenges as demand for goods continued to plummet during the recession.”

As retailer quarterly reports roll in, the “earnings beat” parade continues. Retailers continue to tout their cost-cutting and inventory management initiatives, even as steep sales declines continue to dampen the outlook for the remainder of the year. Below we highlight results from 4 of the companies we cover:

Luxury retail continues to be the hardest-hit sector: Saks Inc. (SKS) posted a loss of $54.5 million ($.39 diluted EPS) compared to a loss of $32.7 million ($.24 diluted EPS) in the same period last year. While this was the 5th consecutive quarterly loss for the company, results were better than analyst estimates for a loss of 52 cents per share. Net sales for the quarter declined 14.5% to $561.7 million, while same-store sales decreased 15.5%. The company said it continued to experience weakness across all merchandise categories and geographies, with the Direct-to-Consumer business and Off 5th showing relative strength. Saks expects comparable store sales declines for the second half of the fiscal year in the mid-to-high single digit range, while comparable store inventory levels are expected to decrease in the low- to mid-teen percentage range through the second half of 2009.

Macy’s (M) kicked off 2nd-quarter earnings season for retailers yesterday (see earnings call transcript), and things picked up today with the Commerce Department reporting July Retail Sales and retail behemoth Wal-Mart (WMT) reporting this morning, followed by earnings reports from department stores Kohl’s (KSS) and Nordstrom (JWN). So far, the theme has been “not as bad as it could have been”, with all those reporting having beaten the oft-lowered analyst estimates on cost-cutting measures and inventory management. However, there are few signs that consumers are in a hurry to boost their discretionary spending – the best that can be said of top-line results is they have stabilized at an extremely low level.

• Nordstrom reported fiscal 2nd quarter net income of $105 million ($.48 per share diluted), which met consensus analysts estimates, but both measures decreased more than 26% from the year ago period. (See earnings call transcript.) Net sales for the quarter declined 6.2% to $2.145 Billion, while same-store sales decreased 9.8%. While this breaks a string of 3 straight quarters of double-digit comparable store declines, it should be noted that this quarter included 3 of the 5 annual sales events held by the company, which helped boost results. For the quarter, Full-Line Stores showed a same-store sales decline of 12.3%, while Direct-to-Consumer Sales were up 3.5%, and Nordstrom Rack once again showed relative outperformance with a same-store sales increase of 0.8%. The company expects full year same-store sales to decline 9-12%, and is raising guidance for the full year from $1.50-$1.65 a share, up from the previous outlook of $1.25-$1.50.

The U.S. Census Bureau reported today that Advance Monthly Retail Sales for July decreased 0.1% from the prior month to $342.3 billion, worse than the 0.7% rise analysts were expecting and the first monthly drop since April.

From the year ago period, sales were down 8.3%. Excluding automobiles, retail and food services sales were down 0.6% from June, less than consensus estimates for a gain of 0.1%, and a decline of 8.5% from a year ago.

Investors will be eying a flurry of 2nd quarter earnings reports from retailers over the next few weeks. As the first major to report, department store retailer Macy’s (M) provided some hope that cost-cutting and inventory management will help stop the bleeding on the bottom line for the sector. However, there are still few signs of a demand recovery, and most retailers will continue to see year-over-year sales declines through the holidays.

For the fiscal 2nd quarter, Macy’s reported a 9.7% decrease in net sales to $5.164 billion from the year ago period, while same-store sales declined 9.5%. Net income was $7 million ($.02 diluted EPS) compared to $73 million ($.17 diluted EPS) last year. Excluding restructuring charges, diluted earnings of $.20 per share beat consensus estimates by a nickel.

As expected, July didn’t provide much of a boost to retailers, as the majority of companies reporting monthly results missed consensus analyst estimates. A combination of unseasonably cool weather, a later Labor Day this year causing tax holidays and promotions to be shifted into August, and consumers continuing to be cautious with their spending resulted in the 11th consecutive month of same-store sales declines.

Overall net sales for July were $27.976 Billion, a 2.7% decline from July 2008. On a comparable same-store basis, sales were down 4.6% from the prior period vs. a gain of 1.7% last July. Retailers continue to be up against tough comparisons from last year when shoppers had stimulus checks to spend. There was decidedly little gains in July from back-to-school spending. Almost every retailer mentioned the effect of Labor day falling a week later than last year – most didn’t start back-to-school promotions until late July or early August, and it seems most consumers are willing to wait for deals to begin the seasonal shopping.

After a summer of unseasonably cool and wet weather, retailers hope they can woo shoppers back to the stores in time for the all important back-to-school season. However, if recent surveys are any indication, results will most likely be disappointing for the second largest shopping season behind Christmas.

Back-to-School season officially kicks off this weekend with sales tax holidays in Georgia and Mississippi, to be followed by 13 other states throughout August. Most states offer exemptions on clothing, school supplies, books, computers and peripherals up to a certain dollar amount. This year, many states grappled with the balance between giving consumers a break and further weakening their own perilous financial situations. As a result of economic conditions, Washington D.C., Florida, Maryland, and Massachusetts decided not have tax holidays for back-to-school this year.

Fast-food giant McDonald’s (MCD) reported fiscal second quarter and June same-store sales results this morning.

McDonald's reported a decline of 2.0% in system-wide sales for June, while comparable sales were up 2.6% vs the year-ago period. Excluding the effects of currency translation, total system-wide sales increased 4.0% during the month.

The U.S. Census Bureau reported yesterday that Advance Monthly Retail Sales for June were up 0.6% from the prior month, better than the 0.4% rise analysts were expecting and the biggest jump since January.

However, most of those gains came from increases in auto and gasoline sales, and the headline figure looks a little less impressive when you consider that sales are down 9.0% from a year ago.

June was another disappointing month for most retailers, as unseasonably cold and wet weather dampened prospects, in addition to the fact that stores were up against comps from last year when consumer had stimulus checks in their pockets. The best performers continue to be teen retailers Aeropostale (ARO) and The Buckle (BKE), as well as off-price retailers TJX and Ross Stores (ROST).

For the 33 retailers we track that report monthly sales data, overall net sales for June were $34.144 Billion, a 2.6% decline from June 2008. On a comparable same-store basis, sales were down 4.7% from the prior period vs. a gain of 2.1% last June. The optimism we saw back in April when things seemed to be improving for the most part has disappeared, as just about every retailer mentioned how tough the retail environment is, and how the frugal consumer has really changed the landscape. Things aren’t expected to pick up through the summer, but the hope is that an early back-to-school season will bring at least marginal improvement starting in September.

PriceSmart (PSMT), which operates US-style membership warehouse clubs in Central America and the Caribbean, reported monthly sales results for June yesterday. Net sales increased 4.0% to $95.7 Million, while same-store sales were up 1.4% YoY on top of a 20.0% gain in the year-ago period.

Though they are still outperforming their peers, having yet to report negative same-store sales throughout the recession, growth has slowed considerably over the past year.

Drug Stores were the first retail sector to report June same-store sales, as both Walgreen (WAG) and Rite-Aid (RAD) released monthly sales figures Friday. The sector continues to perform well, driven almost entirely by strong prescription demand, as front-end sales continue to be soft.

• Walgreen reported an increase of 9% in net sales and a 3.4% increase in same-store sales on top of a 3.4% gain in the year ago period. Comparable pharmacy sales increased 5.8% in June, while front-end same-store sales were down 0.9%, which the company said were hurt by softer sales of seasonal items compared to last year. Though front-end sales have been relatively weak compared to pharmacy sales, the company has only reported one month of negative overall same-store sales throughout the recession, posting a 0.9% decline back in November.
• Rite Aid reported a decrease of 2.5% in net sales and a 0.6% decrease in same-store sales on top of a 0.4% decline a year ago. Front-end same-store sales were down 4.5% while comparable pharmacy sales increased 1.4%. Front-end sales continue to disappoint, but pharmacy demand has stayed strong and prescription sales accounted for 67.9% of drugstore sales for the month.

The goal for both companies is to drive store traffic through pharmacy and health services, while improving the customer experience to improve front-end sales. Nearly 8 million customers a day are served between the two companies, so by leveraging their store networks and the convenience factor, there is certainly room to take market share away from competitors for items such as basic necessities, cosmetics, and accessories.

With consolidation over the past few years, it has become a 3-horse race for pharmacy dominance. This week, we got a peak into the health of the drugstore retail sector as Walgreens (WAG) and Rite Aid (RAD) reported quarterly earnings.

Overall, the sector has held up well, with continued sales gains throughout the recession. Growth has been driven mainly by strong pharmacy demand as all three, including CVS Caremark, depend on RX sales for over 65% of their business. Front-end sales have trailed pharmacy results but drugstores have also taken market share for items such as cosmetics and accessories.

Even in the best of economic times, Aeropostale’s (ARO) performance over the last 18 months would be considered impressive. When you take into account the fact they were posting these results in the worst retail environment in decades, it becomes that much more unbelievable; they have posted positive same-store sales results in 21 of the last 22 months, and for 7 consecutive quarters: