RetailSails

Despite easy comparisons to last year, most retailers reported weaker same-store sales than expected in October. Warmer weather in the first half of the month held back sales of winter apparel and the snowstorm in the Northeast took a bite out of Halloween sales.

Total net sales for the 23 retailers we track increased 5.1% from a year ago to $30.744 billion in October, while same-store sales rose 3.9% on top of a 1.7% gain last year – this was the 26th straight monthly gain after 12 consecutive months of declines, but the smallest increase since March. 18 of the 23 chains reported comp gains for the month compared to just 12 last October, but even some of the best performing retailers managed to disappoint as the majority missed analyst estimates and the composite gain was short of the 4.5% increase projected. For the calendar year-to-date period, total sales increased 7.0% to $317.4 billion and comparable store sales rose 5.2% on top of a 3.5% gain in the first 9 months of 2010.

October is typically a light volume month, as shoppers take a breather between back-to-school and Holiday shopping and retailers focus on clearance sales to make room on the shelves for Holiday merchandise. However, in what could be an ominous sign heading into the most important selling period of the year for most retailers, 70% percent of stores were more promotional this October (according to UBS Investment Research) and nearly 40% of shoppers planned on starting their Christmas shopping before Halloween (according to the NRF), but consumers still cut back discretionary spending and focused on basics last month.

Standouts included Costco (+9% / +7% ex gas & f/x), which is expected to be the big winner this Holiday season, The Buckle (+8.7%), Dillard’s (+8%) and Limited Brands.

Luxury retailers have consistently outperformed since the end of the recession, driven by robust spending from high-income consumers who have been relatively immune to the recent economic weakness. However, sales growth slowed at both Nordstrom (+5.4%) and Saks (+1.8%) last month and both reported comps below expectations.

Off-price stores TJX (+3%) and Ross Stores (+5%) continue to offer the best value proposition for shoppers and we expect them to both be strong performers throughout the Holiday season.

Laggards in October included the usual suspect The Gap (-6%), who announced recently they would close roughly a quarter of their U.S. stores to focus on overseas growth, J.C. Penney (-2.6%) which continues to lose market share to Macy’s (+2.2%) and Kohl’s (+3.9%), Wet Seal (-9.7%) and Bon-Ton (-10.2%).

Economic reports have come in better than expected of late, consumer spending accelerated in September and most analysts predict Holiday retail sales will rise the most in years. However, the savings rate fell to the lowest level since December 2007 last month, consumer confidence measures are at or near recession-era lows and real disposable income has fallen for three consecutive months. Add in the still dismal job and housing markets, and it’s easy to see why Main Street remains still has such a negative outlook.

With that being said, we aren’t reading too much into October’s weakness: retailers have done a much better job controlling inventories than in years past and it’s a good sign chains are not resorting to deep discounts early in the season like we saw back in 2008. However, we believe most analysts and retail executives are too optimistic with their Holiday outlook, and those who speak of “pent-up” demand are starting to sound like a broken record.