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Consumers Continue To Pull The Economy

Retailers reported May sales last week that were generally within analysts expectations. As a group, same store sales increased 1.8% year-over-year. Discount stores continue to be the leading sector in retailing with same store sales increasing 2.2% on average, while department stores continue to lag. While investors look at same store sales as a yardstick for individual companies, monitoring total sales growth paints a much better picture of the health of the overall economy. Growth in total sales continues to indicate that consumers enjoyed spending money. Cumulative sales growth in May for the group of retailers that I frequently discuss increased 7.8% from last year. This almost matched the 8.0% year-over-year increase in April, which was bolstered by the shift of Easter.

The results were very mixed among retailers; in the table below are the results of some of the larger retailer and a few that were abnormally strong or weak.

Retailer Total Sales Same Store Sales First Call Estimates
Abercrombie & Fitch +9.0% -7.0% -3/5%
AnnTaylor +19.1% 9.4% -0.1%
Costco +9.0% +4.0% +5.1%
Dillard's -7.0% -7.0% -2.4%
Dollar General +13.7% +4.9% +4.8%
Family Dollar +13.5% +3.6% +4.8%
Gap +14.0% +10.0% +6.8%
Kohl's +13.9% +0.1% +1.2%
May Department -2.0% -3.9% -3.3%
Nordstrom +8.5% 3.4% -0.2%
Sears -1.3% -1.9% -5.3%
Sharper Image +28.0% +19.0% +10.6%
Target +7.5% +0.7% +0.4%
TJX +10.0% +3.0% +2.4%
Wal-Mart +10.0% +2.1% +2.2%

The Federal Reserve released the latest Beige Book this week, which indicated economic activity remained sluggish during April and May. The report said that the end of the war "appears to have provided some lift to business and consumer confidence, but most reports suggested that the effect has not been dramatic." The Fed also noted that sales remain below last year's level. According the Bank of Tokyo-Mitsubishi weekly same store sales have increased more than 2% on a year-over-year basis every week since late April. Additionally, the Commerce Department reported that retail sales were 4.1% higher in April than a year ago, and even excluding auto sales, retail sales were better than April 2002 by 2.8%. Retail sales for May will be released on Thursday and economists expect sales to be flat with April, but that would still be more than 5% ahead of last year. The Beige Book also noted that several districts were experiencing lower selling prices with a few Districts reporting high inventories. Auto sales appear to be weakening in most of the Districts along with higher inventory levels. Not surprising the strongest sector of the economy according to the Beige Book was residential real estate and labor markets were reported to be weaker across the country. The discrepancy between the Beige Book and other data is interesting. The Fed has been depicting a a weaker economy than other data points suggest. This might be the groundwork for an additional rate cut later this month.

More evidence of the strong real estate market came from Lennar this week. The nation's second-largest homebuilder reported second quarter earnings this week and raised guidance for the full year and next year. Second quarter EPS were $2.05, surpassing analysts' estimates by over 20% and almost 50% ahead of last year's results. Similar to the homebuilders discussed a few weeks ago, Lennar reported record revenues (up 35% year-over-year), earnings (up 51%), and backlog (up 38%).

The mobile handset market is showing signs of weakness. Motorola started off the earning's pre-announcement period on Monday when it announced its sales would be below its previously released guidance. Most of the weakness was attributed to the China market and Motorola cited SARS for the weakness. The world's second largest mobile handset maker said that phone inventories in China are "significantly higher" then in their other markets. Several analysts think that Motorola's woes are attributed to Chinese handset makers ramping up production and taking market share. During the past year Motorola's market share in China has dropped from 30% to 22% as Chinese manufacturers are ramping up production. Nokia also said SARS is contributing to a slowdown in sales as well as the decline in the US dollar. The leading handset maker said sales growth will be at the low end of 4% to 12% range forecasted in April. Texas Instruments completed a SARS trifecta when it cut second quarter growth estimates from 7% to 5%. The leading producer of chips used in mobile phones blamed the weakness in China for the slowdown in sales.

The market continues to be extremely resilient. There has been several "events" that could have sent the market lower. Chief among them was the news that Freddie Mac is under criminal and securities investigation. The overall market has treated this as a stock specific event and has not caused stock prices for other companies dependent on the mortgage market to fall. This is evidenced by stocks like Golden West Financial trading at a new all-time high. The earnings warnings announced by several technology companies have done little to cool investor enthusiasm for other technology stocks. The NASDAQ Composite index reached a new 52-week closing high on Wednesday. It appears that investors might overlook earning for the secondquarter with theanticipation of a recovery during the second half of the year. With the economy showing signs of strengthening there is a good chance that companies will not be guiding down third quarter guidance when they announce second quarter earnings. This scenario would give investors added confidence that the recession is over. However, at this point the recovery is largely based on the extreme credit conditions that currently exist.

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