Retail Earnings Weaker Than Expected

Second quarter earnings reports from retailers provided weaker thananticipated results, as consumer demand wasn’t as strong as many had hoped.  Interestingly, weakness was broad-based, occurring at both low and high-end stores.  Coming into this year, it was believed that a higher payroll tax rate would have the greatest impact on stores such as Wal-Mart (revenue up 2.3%, profit up 1.3%, cut full-year earnings guidance), who cater to the less affluent consumer.  A weaker outlook from high-end stores may indicate something else is occurring.  Citing soft sales trends, Nordstrom lowered its full-year total sales guidance range, now projecting an increase of 3% to 4% from its prior view of an increase of 4% to 6%.  Many economists, including those at the Federal Reserve, are forecasting more robust growth in the second half of this year.  Based on the outlook of retailers, and consumer confidence numbers that recently hit four month lows, it doesn’t appear that the consumer will be driving this anticipated strength. With the U.S. economy being approximately 70% spending driven, the question of where the growth will come from becomes paramount.