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Retail Sales Beat Forecast Despite Payroll Tax Bite

Many top U.S. retailers on Thursday reported strong January sales after offering compelling merchandise that drew in shoppers facing a hit to their take-home pay from higher payroll taxes.

Macy's said sales at stores open at least a year rose 11.7 percent last month, easily beating forecasts, as the company benefited from its speed in getting new merchandise into its stores.

The company also raised its quarterly profit estimate to its original level after lowering it a month ago. Macy's shares were up 3 percent in early trading.

Similarly Gap came in above Wall Street forecasts. The company's affordable Old Navy chain offered colored denims, coats and dresses that drew shoppers.

Costco Wholesale, Target and Victoria's Secret parent Limited Brands also reported stronger-than-expected January sales.

Overall, same-store sales rose 5.8 percent in January across 18 retailers, excluding drugstore chains Walgreen and Rite-Aid, according to Thomson Reuters I/B/E/S. That was above both analysts' estimates of a 3.5 percent increase and the 4.4 percent growth in January 2012.

U.S. consumer sentiment improved in January after Washington's deal at the start of the month to avert the "fiscal cliff" that could have raised taxes significantly, a survey released last week showed.

Cool weather also helped retailers clear their shelves of winter clothing, and a soaring stock market prompted high-end shoppers to hit stores.

At the same time, tens of millions of Americans saw their take home pay fall because of a 2-percentage-point increase in payroll taxes.

"Most people find ways to save money and still go out and spend money on clothing," said David Bassuk, head of AlixPartners' global retail practice. But the tax could pinch shoppers in coming months as relief about the "fiscal cliff" gives way to the reality of smaller paychecks.

"Our guests continue to shop with discipline in the face of a slow economic recovery and new pressures, including recent payroll tax increases," Target Chief Executive Officer Gregg Steinhafel said in a statement.

In that environment, retailers have little margin for error.

Ann said the brightly colored clothes it sold at its Loft chain failed to catch on with shoppers, and its sales estimate for the fourth quarter ended on Jan. 31 disappointed Wall Street.

Cato, a specialty retailer offering low-price fashion, reported a 12 percent drop in same-store sales, and Chief Executive Officer John Cato pinned part of the blame on the payroll tax. Cato lowered its profit outlook for its fourth quarter, which ended on Feb. 2.

Department store operator Bon-Ton Stores as well as teen chains Buckle and Wet Seal also reported disappointing sales.

The index offers only a glimpse of retail spending as major chains such as Wal-Mart Stores, Sears Holdings, and Best Buy do not report monthly sales.

The colder midmonth weather in the eastern half of the country probably helped many retailers. January is a small month for retailers, and their profits depend on how little they have to discount to clear their shelves for spring merchandise.

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