Retailers Disappoint as Tax Check Money Runs Out

Retailers are largely reporting disappointing sales in July, with many retailers falling short of analyst estimates, as consumers remain cautious with their spending and are running out of extra cash from their tax rebate checks.

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Even discounters such as Target Stores and Wal-Mart Storesfell short.

Wal-Mart, the world's largest retailer, warned that it was beginning to see the end of the benefit from the tax rebate checks consumers began to receive in May. The retailer said traffic in its stores continues to improve, and it expects it is well-poised to benefit from cash-strapped consumers looking for bargains. However, investors saw the results as lackluster, and Wal-Mart shares were down about 3 percent before the opening bell.

Wal-Mart was not alone. Of the 33 retailers that had reported same-store sales results before 8:30 am New York time, only 39 percent topped analyst estimates, while 61 percent fell short, said Thomson Reuters.

Not surprisingly, apparel retailers tended to fare with worst, as consumers stocking to buying the essentials.

Children's Place , Chico's FAS , Wet Seal , and Abercrombie & Fitch reported the biggest shortfalls compared with Thomson Reuters estimates.

Meanwhile, some of the strongest sales compared with estimates came from Dillard's Department Stores , Aeropostale and Haverty's Furniture , Thomson said.

Wal-Mart Raises Red Flag

After several months of stronger-than-expected sales, Wal-Mart said its same-store sales rose 3 percent in July when fuel is excluded. That increase fell short of the 3.4 percent gain that analysts, on average, were predicting, according to Thomson Reuters. Including fuel, same-store sales were up 1.9 percent.

"With the end of the stimulus checks, we know consumers are spending more cautiously, and we continue to see a pronounced paycheck cycle at the end of the month," said Wal-Mart President and Chief Executive Eduardo Castro-Wright, in a press release.

Wal-Mart forecast August same-store sales growth of 1 percent to 2 percent, and sees second-quarter sales of $102 billion. The analyst consensus is for revenue of $101.66 billion in the quarter.

Over the past year, retailers have eked out slim sales gains as rising gasoline prices, a crumbling housing market, tighter credit and rising grocery bills have forced consumers to pull back on spending.

Stimulus checks helped spur spending, but that trend will come to an end soon.

"The stimulus checks, the last ones, were issued on July 11, so they definitely were going to come to an end," said Dana Telsey, chief investment officer of Telsey Advisory Group. (For the full interview with Telsey, watch the video above.)

But Wal-Mart's report also raises red flags about the direction consumer spending is heading.

David Rosenberg, chief North American economist for Merrill Lynch, told CNBC on Wedneday that the U.S. economy is facing the first consumer recession since the early 1990s. (Click here for the full story).

Target said same-store sales fell 1.2 percent in July, missing its own and analyst expectations.

The discount retailer says results were near the low end of its expectations of a 1 percent decline to a 1 percent increase.

Some non-discount chains such as the Gapand J.C. Penney said they expect earnings will be stronger than expected for the fiscal second quarter, which just ended. But these companies continued to see steep sales declines from the year-ago period.

At the Gap, same-store sales fell 11 percent last month, led by declines at its North American Banana Republic and Old Navy stores.

J.C. Penney posted a 6.5 percent decline, and predicted a mid-single-digit drop due to the timing of back-to-school sales. A mid-single-digit drop is seen for August.

Meanwhile, the department-store giant sees fiscal second-quarter earnings of 50 cents to 52 cents a share; the firm in May projected around 38 cents a share.

In general, department store sales were weak. From the high-end to the mid-tier, there were sales shortfalls.

Saks posted a bigger-than-expected 5.3 percent drop, while Kohl's sales fell 10.4 precent, which was wider than analysts expected.

Costco A Bright Spot

One of the few bright spots among the retailers reporting early results was wholesaler Costco,which is benefiting from consumer thriftiness.

Costco said sales at U.S. stores open a year or more rose by 10 percent in the four-week period ending August 3, including gasoline sales, which comfortably topped expectations of analysts polled by Thomson Reuters for a rise of 7.6 percent.

Gas sales helped to boost results as the cost of filling up the tank at the chain rose by 41 percent, Costco said, but U.S. same-store sales excluding gas also beat forecasts in the same period with a 6 percent increase compared to the 4.6 percent rise predicted by analysts.

Although both Costco and Wal-Mart cater to bargain-hungry customers, there are some key differences between the two retailers.

"Costco has much more of a business customer than what you have at Wal-Mart," Telsey said. "Costco also has a higher-income customer. Costco has better brands than what you're seeing at Wal-Mart. I think it's a different equation. The Wal-Mart customer overall, they're living more paycheck to paycheck and can't afford the large quantities that are in Costco."

"I think Wal-Mart has had a very good run," Telsey said. "I think as we move forward, for the upcoming holiday season, the value message is still going to be what works, and that'll still be what Wal-Mart says."

Telsey expects Wal-Mart to be one of the winners for the upcoming holiday season, but she also expects the next couple of months to be challenging.

"I think September's going to be a better month than August," Telsey said.

She expects some retailers' August same-store sales will be hurt by the lack of a back-to-school sales-tax holiday in Florida.