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Retail Stocks Higher, Buoyed Up by Strong Forecasts

Retailers reported disappointing sales in July, a sign that consumers are continuing to watch their spending carefully and hunting for the best bargains.

But investors, betting that the stage is set for future recovery, sent retail stocks higher, encouraged by the ability of retailers to raise earnings forecasts despite the weak sales reports.

Same-store sales fell an average 5.1 percent, a touch below the average analyst estimate of 5 percent estimate from analysts surveyed by Thomson Reuters. Discounters, teen apparel and drug stores were among the weakest in the sector.

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Despite the weak results, several retailers raised their earnings forecast, showing how carefully retailers are managing their business.

Macy's, for example, posted a disappointing 10.7 percent decline in same-store sales in July. That was a wider loss than analysts were expecting, but shares traded higher as the department store chain gave an upbeat profit forecast.

Dana Telsey, CEO and chief research officer of Telsey Advisory Group, told CNBC Thursday the trends are a sign of margin recovery, which sets the scene for a sales recovery.

“It’s not that the sales are so great,” said Telsey. “They’re not so great, it’s that the margins are coming in better than expected. We still need more traffic in the stores.”

Most analysts had been expecting retailers to report weak sales growth in July due to steep declines in back-to-school spending, which is forecast to be down nearly 8 percent from year-ago levels, according to the National Retail Federation. Several states have pushed back the timing of tax holidays for school shopping, which appears to have prompted consumers to postpone shopping.

Among those faring the best compared with expectations were discounter Kohl's and luxury retailer JW Nordstrom , which beat estimates with a same-store sales decline of 6.9 percent. The Thomson Reuters survey estimated a decrease of 11.1 percent.

Like Macy's, Kohl's raising its earnings forecast. The retailer said same-store sales rose 0.4 percent in July, topping the company's expectations for a decline of 3.2 percent. Kohl's now expects earnings to be in a range of 73 cents to 74 cents a share. Previously, the company expected earnings of 56 cents to 64 cents a share.

J.C. Penney's reported same store-sales plunged 12.3 percent, wider than 11.4 percent decline analysts had forecasted, but the company said it expects its second-quarter loss to be just a penny a share, compared with its earlier forecast of a loss of 8 cents to 12 cents a share.

"Shoppers are not yet ready to spend freely," said Frank Badillo, Senior Economist at Retail Forward. "But the results reported by retailers provide some signs that shoppers are easing up on their cutbacks. And that's especially encouraging given the variety of factors weighing on retail sales in July."

TJX , the holding company for discount retailers T.J. Max, Marshalls, HomeGoods, and A.J. Wright stores, was among one of the bright spots. It reported an increase in sales of 4 percent, beating the Thomson Reuters estimate of 2.3 percent.

Teen apparel retailers did not fare as well as with a combined same-store decrease of 12.1 percent, versus Thomson Reuters estimate of a 10.9 percent decrease.

One good example of what is going on with teen retailers is The Buckle , which had posted double-digit same-store sales gains for 22 consecutive months. That streak was broken in June, and continues in July. The company said Thursday its same-store sales rose 2.8 percent in July, which is a solid increase compared with other retailers that have reported so far. However, analysts surveyed by Thomson Reuters were expected the company to report a 10 percent increase in monthly same-store sales.

Other teen apparel retailers also have posted steep same-store sales declines. Zumiez said its monthly same-store sales fell 16.8 percent, which was narrower than the 20.8 percent sales decline predicted by analysts surveyed by Thomson.

Hot Topic's monthly sales fell 8.5 percent, to narrowly outpace estimates. Analysts had predicted an 8.9 percent decline Thomson said.

But the declines at Abercrombie & Fitch were steeper than expected. Same-store sales tumbled 28 percent, a wider loss than analysts had expected. According to Thomson, same-store sales were estimated to be down 25 percent.

Warehouse clubstore Costco reported a bigger-than-expected 7 percent drop in same-store sales in July, hurt mainly by a strong U.S. dollar.

Analysts, on average, were expecting a decline of 6.7 percent, according to Thomson Reuters.

"The stronger U.S. dollar versus international currencies compared to last year resulted in an overall detriment in our reported July comps of 2.25 percent," a company executive said on a pre-recorded telephone message.

Same-store sales at its U.S. locations decreased 8 percent, while international division sales fell 5 percent.

Excluding gasoline price deflation, Costco said U.S. comparable sales would have been down 2 percent, while on a local currency basis international same-store sales increased 6 percent.

BJ's Wholesale Club faced a steeper decline than its competitor Costco with a same-store sales drop of 9.1 percent, versus the streets estimate of a 6.5 percent decrease.

The discount store Target fell in line with the pattern with sales dropping 6.5 percent, surpassing Thomson Reuters estimate of a 5.8 percent decrease.

However, Target CEO Gregg Steinhafel said the company's sales fell in line with their expectations.

"While our sales remain challenging, we continue to experience favorable gross margin performance within categories and disciplined expense control in our retail segment, as well as modestly improving risk trends in our credit card segment," said Steinhafel.

The high-end department store Saks stayed close to analysts' estimates, coming in at a decline of 16.3 percent, slightly below the expected 16.6 percent decline.

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