Back-to-School Results Portend Lingering Weakness

Modest sales improvements among mass merchants during back-to-school season suggest supermarkets are likely to see languid sales at best through the rest of the year, though slight inflation could help sales numbers improve, industry analysts told SN last week. Among mass merchants that compete with supermarkets, August sales rose 9% at Costco Wholesale Corp., Issaquah, Wash., but only 1.9% at BJ's

Modest sales improvements among mass merchants during back-to-school season suggest supermarkets are likely to see languid sales at best through the rest of the year, though slight inflation could help sales numbers improve, industry analysts told SN last week.

Among mass merchants that compete with supermarkets, August sales rose 9% at Costco Wholesale Corp. [4], Issaquah, Wash., but only 1.9% at BJ's Wholesale Club [5], Natick, Mass.; and 1.8% at Target Corp., Minneapolis. Food categories showed double-digit increases at Target and single-digit increases at Costco while rising 4% at BJ's.

The second-quarter numbers Kroger Co. [6] is scheduled to report this week could indicate the short-term direction some supermarkets will take, according to Scott Mushkin, executive director at Jefferies & Co., New York. “Kroger is the elephant in the room, and what Kroger will look like will indicate what direction the industry may be headed,” he told SN.

Based on back-to-school sales among mass merchants, Kroger's numbers this week will probably be strong, Mushkin said, citing the August sales results at Costco, “which has been able to pass along inflation due to its disciplined margin structure.”

“So we're anticipating strong numbers from Kroger, in line with the strong results Publix [7] reported, since both Kroger and Publix are more like Costco in terms of distribution efficiencies and margin discipline. But companies like Winn-Dixie [8] and Supervalu [9] will continue to struggle, with Safeway positioned somewhere between them and Kroger,” he said.

The double-digit pickup in Target's food sales in August is not good news for supermarkets, Mushkin added, “because much of that increase came from its expansion of P-fresh sections, and those sections have maximum impact on grocers in the marketplace.”

With consumers continuing to trade down and utilizing coupons to save money, passing through inflation will be tough for supermarkets, Mushkin said, and any pass-throughs will likely be tied to changes in the unemployment situation.

Andrew Wolf, managing director for BB&T Capital Markets, Richmond, Va., offered a similar outlook. “For supermarkets and other traditional retailers that are not discounters nor high-end stores — the big middle — sales are not picking up, and that's probably going to remain unchanged as long as the economy is in a slump,” he said.

But it won't take a big lift in unemployment or other indicators for a positive trend to begin, he added.

“Supermarkets are seeing some food inflation creeping in at the cost level, and it will creep in on the retail side by the end of this year or in early 2011,” Wolf said, “and that should make sales look better. It won't require a big rebound in employment — just a slow improvement, which I think we're beginning to see materialize, combined with food inflation — to make a sales improvement likely.”

Gary Giblen, executive vice president at Quint Miller & Co., New York, said back-to-school sales in August indicate consumers are buying “ever closer to need, so the consumer is still cautious.”

He said discount retailers clearly benefited in August from Wal-Mart's letup in the rollbacks it featured in July. And with Aug. 1 falling in the 2010 August numbers, compared with a later start date for the period in 2009, “the paycheck cycle really helped August reports.”

“August sales held up relatively well because shoppers' intention to curb their spending plans was outweighed by their back-to-school needs, especially when they scrimped on meeting those needs a year ago,” said Frank Badillo, senior economist in the Columbus, Ohio, office of London-based Kantar Retail.

“Same-store sales held up well, despite indications in August that shoppers continue to ease up on their spending plans from the high point reached in May, [which] coincided with a spring spending surge fed by pent-up demand and economic stimulus in the form of appliance rebates and mortgage credits that had expired by mid-year,” he said.

Despite the August results, however, a turnaround in shoppers' spending intentions may mean retail sales will be hard-pressed to sustain their boost from back-to-school spending, Badillo said.

Among shoppers questioned in August, he noted, 38% said they planned to spend less in September than they did a year ago; 53% said they expected to spend the same amount; and 9% said they planned to spend more.

That letup in spending intentions “may partly reflect a more negative perception of their financial health compared with July, with that negative shift focused among up-market households in terms of home values,” Badillo said. “Home values may be looming large as households discover, in the wake of applications for home refinancing, that their homes are valued below what they thought.”

Among companies reporting August sales results:

  1. Costco said overall sales for the month rose 9%, with food categories experiencing the strongest sales increases — in the low double digits for food and the mid-single digits for health care and beauty.

    Costco said its fresh food business experienced comps in the mid-single digit range, led by produce, whose average sale price was slightly inflationary and relatively flat compared with last year; service deli; and meat, whose average price was up in the mid-single digits year-over-year.

  2. Target said overall comps increased 1.8%, with food and sundries comps rising in the mid-single-digit range, led by deli, cooler, candy and sundries. “While some departments within food and sundries were deflationary for the months, others were inflationary, resulting in a slight amount of inflation for the category overall,” the company said.

  3. BJ's said overall sales for the month, excluding gasoline, climbed 1.9%, with food sales up approximately 4% and general merchandise sales declining approximately 1%.

Food departments with the strongest sales included bakery, dairy, frozen, meat, milk, produce and snacks, the company said, while those with weaker sales included health and beauty aids.