Tags: U.S. Economy

Warehouse Sales Growth Not a Good Sign for the U.S. Economy

By , Money Morning •

By Jennifer Yousfi
Managing Editor

April was a strong month for retail sales, with Thomson Reuters data showing 68% of stores reported better-than-expected same-store sales.

It was the best showing for the retail industry since November, but don't be quick to assume that means the sluggish U.S. economy is on the mend. Stores got a slight bump due to an extra sales day in April, as the Easter holiday fell in March this year. Also, large chain stores that sell consumer staples at discount prices performed the best.

"Discounters clearly stood head and shoulders above all comers," Ken Perkins, president of Retail Metrics Inc., told Reuters.

Wal-Mart Stores Inc. (WMT) beat analyst expectations of 2.1% same-store growth with a 3.2% sales growth rate in April. And Costco Wholesale Corp. (COST) did even better with an 8% jump in same-store sales, which again bested analyst expectations of 6% according to Reuters estimates.

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"If you didn't have a sale, you didn't have customers," Britt Beemer, founder of America's Research Group, said in a Bloomberg News telephone interview. "Consumers are having a hard time dealing with inflation in both food and fuel."

With unemployment hovering around 5% and oil over $120 a barrel pushing up prices at the pump, U.S. consumers are seeking out cheaper prices on food staples. Not only do they save per unit by buying in bulk, but they also make fewer trips to the store, reducing gasoline consumption.

"The economy continues to get tougher and the 'paycheck cycle' is more pronounced for customers than in past months. As money gets tighter for them toward the end of the month, sales drop more than we have seen in the past," Eduardo Castro-Wright, Wal-Mart Stores U.S. president and chief executive officer said in a statement.

Soaring Costs Boost Sales

In addition to benefiting from bargain-hunting consumers, the same-store sales figures of the discount and warehouse chains enjoyed a boost from another source as well: inflation.

"We are, of course, benefiting from some inflation on the food side as a result of the recent run up in the cost of commodities and the continued run up in the price of oil and gasoline," Costco said in a statement.

The U.S. Federal Reserve's aggressive rate-cutting campaign has weakened the greenback, which in turn has put upward pressure on the cost of commodities, many of which are priced in dollars.

Same-store sales figures are measured in total dollars sold, not by volume. Therefore, an increase in prices means an increase in total sales, even if the quantity sold remains the same.

It also doesn't mean that the chain stores are necessarily profiting from the higher sales figures. Higher commodities costs mean higher supply prices for the retail outlets and customers alike. Stores such as Wal-Mart are forced to either raise prices or in some cases accept the slimmer profit margins.

However, the weak dollar is helping with international sales. At Costco, which has warehouses in Canada, Korea, Taiwan, Japan and others, sales outside the United States increased 14% in April. But if that figure is rendered on a local currency basis, the increase is only 6%.

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