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Retailers post monthly sales gains, but is it enough?

By Ylan Q. Mui

Several of the nation's largest chain stores posted solid sales gains in July compared to a year ago, but analysts warned that consumer spending has slowed considerably in recent months.

Target reported this morning that sales at stores open at least a year -- a key measure known as same-store sales and an important barometer of a retailer's health -- rose 2 percent in July compared to the same month last year. Gap's sales were up 1 percent in July after falling 8 percent a year ago. The increase was driven primarily by strength in
its discount Old Navy division.

But J.P. Morgan analyst Brian Tunick said some of the gains by retailers were simply a numbers game: The industry recorded its lowest sales of the year in July 2009, making those results easy to beat.

Broader measures of consumer spending have shown a slowdown in demand in recent months as government stimulus programs phase out and unemployment remains persistently high. Research by MasterCard Advisors that analyzes payments found spending to be largely flat for most sectors of retail, with particular weakness in apparel.

"Overall, retail sales continued to tread water, following the pattern set with June's sales, when consumers demonstrated a reluctance to make larger purchases, and instead, traded down," said Michael McNamara, vice president for research and analysis forĀ  MasterCard SpendingPulse.

Several value retailers were among the strongest performers, a reflection of consumers' continued frugality. Warehouse club Costco's sales soared 6 percent in July, and Kohl's said its sales jumped 4.1 percent from a year ago. It was so encouraged by the results that it raised its earnings forecast 10 cents to 80 to 82 cents per share.

July tends to be a transitional month for the retail industry as it clears out summer merchandise and prepares for back-to-school shopping, the second-biggest season of the year. But Weeden & Co. analyst Amy Noblin said retailers' July results are likely to say little about how back-to-school shopping will fare this year.

"We think it is too early to extrapolate the trend as consumers are waiting much later in the season to shop," Noblin wrote in a research note. The back-to-school season "was promotional out of the gates and will likely get more aggressive as we enter the heart of back to school selling."

By Ylan Q. Mui  |  August 5, 2010; 9:50 AM ET
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