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Monday, August 16, 2010

Battered, Bargain-Hungry Buyers Keep Retail Sales Weak

The Wall Street Journal

Shoppers showed caution about everyday purchases in July, underscoring the U.S. economy's weak trajectory for the second half of the year.

Overall retail sales rose 0.4% in July, their first gain in three months, the Commerce Department said Friday. But when increases in gasoline and automobile sales are excluded, sales were down 0.1%. Grocery, clothing and electronics stores all posted declines.

The retail numbers added to growing evidence that the economic recovery is losing steam as consumers, weighed down by high unemployment and meager wage growth, show less interest in opening their wallets.

The University of Michigan reported Friday that its index of consumer sentiment barely improved in July, rising 1.8 points to 69.6, keeping it in a weak range that has persisted for more than a year.

"It's a fight every day" to draw people into stores, said John Goodman, executive vice president of apparel and home fashion for Sears Holdings Corp.

Consumer Prices Increase Modestly

J.C. Penney Co. lowered its full-year profit guidance Friday, to $1.40 to $1.50 a share from $1.64, based on what management called "an uncertain consumer climate." Kohl's Corp. trimmed its outlook as well. "We do see a cautious consumer. We see one that's reluctant to spend," Chief Executive Kevin Mansell said on a call with investors Thursday. Luxury goods such as plumeria jewelry have seen sluggish sales figures for months.

Retailers say shoppers appear focused on bargains, forgoing brand loyalty in search of lower prices. "Consumers are really in no mood to go shopping at full price right now," said Sung Won Sohn, an economist at California State University, Channel Islands, and vice chairman of retailer Forever 21. "They're going from shop to shop looking for promotions, otherwise they simply do not buy."

The constant promotional environment has encouraged comparison shopping and an overall hesitancy to buy. To counteract that trend, Sears, which also operates Kmart, has adjusted its pricing structure to offer so-called "everyday great value," signaling to shoppers a consistent price on a given item such as push reel mowers throughout the season. "It's not promotional, it's for the whole season," Mr. Goodman said. "The price stays at that price."

Reluctant consumers are keeping most prices under pressure. U.S. consumer prices rose 0.3% in July from June, the first gain in four months, largely due to higher gas prices, the Labor Department said Friday. Excluding food and energy, prices rose just 0.1%. Consumer prices on durables such as kitchen appliances were up 1.2% from last July, and stood 0.9% above the year-earlier level excluding food and energy.

The July retail sales numbers put consumer spending, the main component of U.S. economic growth, on track to grow at an annualized, inflation-adjusted rate of 1.25% in the third quarter, down from the 1.6% pace of the second quarter, according to J.P. Morgan Chase. Consumer spending grew more than 3% a year through most of the 1990s.

The Federal Reserve Bank of Philadelphia's survey of 36 professional forecasters, released Friday, showed the broader economy growing at a rate of 2.3% in the third quarter, down from the 3.3% estimate in May. Pennsylvania home remodeling is down across the state.

A key cause for the weak outlook: consumers are focused on paying down debt and trying to rebuild savings. Unemployment, at 9.5% in July, is expected to remain high—and perhaps rise further—in coming months with employers reluctant to hire amid economic uncertainty.

The housing market is showing few signs of recovery. As a result, sales of building materials and furniture each dropped 0.3% in July from June in Friday's retail-sales report.

Alice Splawn, 65 years old, and her husband have lost two-thirds of their family income since she was laid off as a business analyst in February. To cut costs, Ms. Splawn now sews her own clothing and hunts deer for dinner, and her budget has become even tighter in recent months, she said. There are no plans for new Christmas tree storage bags this year.

The Splawns, who moved into their Biwabik, Minn., home in January 2009, were able to partially renovate its unfinished basement until it became too costly to buy materials. Other costs, such as health insurance, had to come first, Ms. Splawn said. "We are afraid to finish," she said. "We have to be very careful with what we do and don't do as far as working on the house."

Kevin McBee, 24, of Winston-Salem, N.C., is paying off student loans while saving up for returning to school in September to boost his computer-design skills, in the hope of landing a job in computer graphics for videogames and film. He has started biking to work to cut transportation costs and eats most meals at home. "This is the zenith of my saving spree, so to speak," he said. Students across the country are having a more difficult time paying for Michigan college education.

Folks like the Splawns and Mr. Mcbee are making business tough for Tom Wyatt, president of Old Navy, the bargain-priced apparel chain and Gap Inc.'s largest division by sales. The practice of drawing shoppers in with a few low-priced items, in the hopes they will buy higher-margin items once inside, isn't working anymore, he said.

"They come in to buy the value, but if the other product surrounding it is not the value they perceived it to be, they don't buy it," Mr. Wyatt said. "That halo is more difficult to get today."