Retailers reported sales in June that looked very solid, but the virtual silence regarding second-quarter earnings speaks volumes.
It's too early to say what the consumer thinks and how the consumer will behave in July and in the months ahead, especially given the headwind of higher apparel prices this fall. But it is disconcerting that although many retailers far outpaced analysts' estimates for June sales, hardly anyone raised their second-quarter forecast.
Macy's was a lone exception, and it wasn't the first time the retailer has raised its forecast this year.
"It was a surprisingly good month," said Chris Donnelly, senior executive with Accenture's retail practice.
One reason the sales were encouraging was that June is not an event-driven month, he said. Although Father's Day may have driven some sales of men's apparel, it is not the type of holiday that inspires large amounts of retail spending.
Instead, it was a break in the weather that finally brought the warm temperatures and sales events at stores that helped to get consumers into the shopping mood. Investors obviously are encouraged by these results, and the S&P Retail Index hit a fresh 52-week high.
But some analysts voiced concerns about the health of the consumer.
"The real test for the American consumer is can they pay 10 percent higher prices for clothing, beginning really in the next two months," asked Brian Tunick, an analyst for JP Morgan who expects that the higher cost of cotton will result in an increase of about 10 percent in apparel prices. "Because if not, retail margins and earnings could really be hurt here."
Donnelly also has questions about where the money is coming from to make the purchases.
"In aggregate, consumer spending is constrained," he said, citing a number of inflationary pressures, such as higher food and gas costs than last year, the lack of wage growth and continuing high levels of unemployment.
"Where is the money coming from?" he asked. If consumers are starting to take on more debt again by charging items to their credit card, Donnelly does not expect that trend will be sustainable. "There's no obvious source of funds."
We know the affluent consumer is fine, but there are concerns about other income levels.
JC Penney , which was one of the few retailers to fall short of analysts' estimates, described the "moderate customer" as being very value-driven in their purchase decisions. This forced the company to cut prices more than planned.
Obviously in light of JC Penney's weak results, one could write off their observation as an excuse to cover up for bad merchandise decisions, but the comments are not coming in a vacuum.
Fred's , another retailer that reported sales that fell short in June, said, "June sales reflected the volatility experienced with our customers' purchase patterns and demonstrated the broader decline in consumer sentiment that has been reported for the month."
According to the retailer, there was a very pronounced "paycheck" cycle this month. Sales in June started off strong, but although the number of customers at the store remained positive, the average ticket declined. What's more, sales in its stores on July 1 were the highest single-day amount for the year so far.
That pattern argues against the excuse of poor merchandise, and for an argument that some consumers are unable to spend freely.
Wall Street Strategies analyst Brian Sozzi recommends investors be very selective when buying retail stocks.
"It's a high-end and very low-end long thesis, with targeted shorts on those names catering to the middle income by selling high-ticket items, like furniture (where obviously there is no pricing power at this moment in time)," he said.
July will be another month that separates those retailers with must-have merchandise from those that don't. The ones with the desirable goods will sell the fresh merchandise that's arriving now for back-to-school season at full-price, while the others will have to try to push what's left of the clearance items on their shelves at a steep markdown.