Retailers cautious after discounts boost July sales

(Reuters) - Retailers reported stronger-than-expected sales for July, but the gains were largely due to discounting and do not necessarily signal vigorous consumer spending for the rest of the year.

The sales reports also show signs of troubles are surfacing at some teen apparel chains as the back-to-school shopping season gets into full swing.

U.S. sales at stores open at least a year rose 4.6 percent in July, well above the analysts' average forecast of 3.1 percent, according to Thomson Reuters I/B/E/S. The figures exclude drugstores.

"The consumer has decided to shake off the bad news and is stocking up for back to school," said Madison Riley, managing director of retail consulting firm Kurt Salmon. "All retailers are looking at the second half with caution, so you want to bring in freshness as soon as you can."

Riley and others noted that the earlier start to back-to-school shopping had probably pulled forward some of that business from August and September.

Most retailers offered discounts in July to clear out leftover summer merchandise and make room for back-to-school items and other fall goods.

While July is typically one of the lowest-volume months, it kicks off the back-to-school season, the second-biggest sales period of the year after the winter holidays.

Few on Wall Street expect July numbers to dispel concerns about the U.S. economy, which has been cooling after showing some strength early in the year.

Many industry observers said August would be a better gauge of demand in the U.S. economy than July.

"Most states run their tax-free holidays in August, so people are waiting for that," said Ted Vaughan, a partner in the retail and consumer products practice at consulting firm BDO USA.

Michael Niemira, chief economist of the International Council of Shopping Centers, also expects sales tax holidays in at least a dozen states from Virginia to New Mexico to boost August sales. The ICSC sees August same-store sales, excluding drugstores, rising 4 percent to 5 percent.

Some of the July sales winners were Gap Inc; Costco Wholesale Corp, which topped same-store sales estimates for the first time since February; teen apparel chain American Eagle Outfitters Inc and Victoria's Secret parent Limited Brands Inc.

Chains posting disappointing results for the season included Aeropostale and Abercrombie & Fitch, which typically do not issue monthly sales results.

The Standard & Poor's Retail Index was down less than 0.1 percent, while the broader Standard & Poor's 500 Index fell 1.3 percent on concerns about Europe.

Federal Reserve officials recently described the U.S. economy as having "decelerated somewhat." That marks a change of tone from its previous assessment in June, when it said the economy had been "expanding moderately."

Target Corp Chief Executive Officer Gregg Steinhafel called the retail environment "quite challenging." The discount chain's same-store sales rose more than expected.

Shoppers are closely monitoring the state of the economy.

"I know it's not doing good," said Gavynn Arteaga, 15, who lives with his mother in Marana, Arizona. "I have to watch what I spend on. Obviously, money's not coming as easy as it did."

Back-to-school results generally foreshadow those of the winter holiday shopping season, Vaughan said.

TEEN ANGST

Gap shares were up about 10 percent after the apparel chain reported a much bigger-than-expected 10 percent rise in same-store sales. Analysts were looking only for a 3.8 percent increase.

The retailer also estimated quarterly earnings above Wall Street expectations.

Limited Brands' same-store sales rose 8 percent, beating analysts' estimates, and the company raised its earnings outlook.

American Eagle was another chain to raise its quarterly profit outlook after reporting much stronger-than-expected sales. Its revamped merchandise has struck a chord with its young clientele.

The company "showed the ability to entice customers with new back-to-school merchandise along with significant deals on clearance tables," Nomura analyst Paul Lejuez said.

But American Eagle's teen rivals disappointed investors.

Abercrombie & Fitch Co forecast quarterly earnings about 50 percent below analysts' expectations after same-store sales fell 10 percent. Its shares fell 15 percent.

Aeropostale Inc, meanwhile, reported weaker-than-expected quarterly sales, sending its shares down 33 percent.

(Reporting by Dhanya Skariachan and Phil Wahba in New York, Jessica Wohl in Chicago, Lisa Baertlein Los Angeles and Juhi Arora in Bangalore; Editing by Lisa Von Ahn and Kenneth Barry)

By Dhanya Skariachan

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