Target, other retailers deliver solid sales gains

Despite a weakening economy, retailers are still luring plenty of Main Street customers. They're having less luck with Wall Street investors.

Boosted by strong sales of clothes and household goods, retailers posted solid sales gains in July even as the economy shows signs of stalling.

Take Minneapolis-based Target Corp. The discounter said sales last month at stores open for at least a year grew a healthy 4.1 percent compared with 2 percent during the same period in 2010. Overall, Target's second-quarter sales jumped 5.6 percent to $4.85 billion.

"We're very pleased with Target's July sales performance, which again was at the high end of our expected range," CEO Gregg Steinhafel said in a prepared statement. "In addition, back-to-school sales are off to a solid start, contributing to our confidence of the strategies we have in place and our ability to execute them, especially as we head into the 2011 holiday season."

Yet Wall Street pummeled Target stock Thursday -- along with the shares of most large companies amid a global rout of equities. Target shares dropped $1.94, or nearly 4 percent, to close at $47.81. It has been a brutal week for Target investors. Since Aug. 1, Target shares have fallen about 7 percent.

The sell-off was sparked by continuing fears of economic weakness in the United States and a spreading debt crisis in Europe. The nation's economy grew a meager 1.3 percent in the second quarter. Unemployment remains stubbornly high at 9.2 percent. Consumer spending unexpectedly dropped in June for the first time in two years. Some economists warn the country may yet fall into another recession.

That spells bad news for retailers as they enter the key holiday shopping season. Until now, retailers have enjoyed favorable comparisons with last year's tepid sales, said Mike Berry, director of industry research for MasterCard Advisors SpendingPulse. But the 2010 holiday season went reasonably well for retailers, which means a bad holiday performance this year will look even worse by comparison, he said.

That may explain why retail stocks are particularly radioactive right now. Shares of Macy's Inc., which reported a 5 percent same-store sales gain in July, fell $1.70, or 6.1 percent, to close Thursday at $26.13. Despite a 15.6 percent same-store sales gain, Saks Inc. stock fell 65 cents, or 6.4 percent, to close at $9.47.

And those were July's winners. Kohl's Corp., which reported a worse-than-expected 4.6 percent same-store sales decline, saw its stock decline $4.12, or nearly 8 percent, to $47.67. Gap Inc. said same-store sales fell 5 percent. Investors subsequently punished the stock, which fell $2.23, or 11 percent, to $16.98.

On a bright note, consumers so far seemed unfazed by higher prices retailers are charging to offset rising commodity costs. Target, for example, said grocery comparable-stores sales increased in the mid to upper teens while health care, beauty, and household essentials grew in the mid to upper single digits.

"I don't think the price increases are big enough to impact unit sales," said James Rushing, a vice president in the retail practice at A.T. Kearney, a global management consulting firm.

Retailers are managing their inventories better, he said. Last year, shoppers couldn't find the size shoe or sweater they wanted.

Thomas Lee • 612-673-4113