GPS Gap Inc

By Eric Morath and Suzanne Kapner 

Consumers boosted spending in April to the highest levels in more than a year, accelerating their turn toward online shopping and widening the divide between in-store retailers and Internet outlets pitching lower prices and convenience.

While data from the Commerce Department on Friday showed overall retail sales rose 1.3% in April from a month earlier, the category that includes shopping on Amazon.com Inc. and rival websites and apps grew 2.4%. And in the past year, Internet and catalog sales have grown more than three times as fast as overall sales, up 10.2%. Department-store sales, meanwhile, sank 1.7% over the past 12 months.

Results from the retail sector this past week showed how the shift is knocking down major companies despite resilience in the broader economy. Major retailers including Macy's Inc., Kohl's Corp. and Nordstrom Inc. this week reported sharply lower sales and profits, while Gap Inc. said it was considering closing more stores after sales continued to sink.

Amazon is now the second-largest apparel seller in the U.S., behind Wal-Mart Stores Inc., according to Morgan Stanley. That category was once dominated by department stores.

"Just like bookstores and music stores and hardware stores before them, apparel retailers are underestimating how fast Amazon is going to eat their lunch," said Joel Bines, co-head of consulting firm AlixPartners LLP's retail practice. "We've seen this movie before."

Executives at traditional large retailers struggled to explain the slump, which for some companies was their worst since the recession. Some pointed to a decrease in mall traffic, while others said shoppers were spending more on items their stores don't sell such as entertainment, travel and food.

"The consumer was simply spending their hard-earned dollars in experiences, entertainment and to beautify their home," J.C. Penney Co. Chief Executive Marvin Ellison said Friday after reporting lower-than-expected sales. The chain is responding by adding appliances and other home goods to its stores.

For economists, Friday's data offered a glimmer of optimism, no matter where the money was being spent. Consumers remain the primary driver of the U.S. economy, accounting for more than two-thirds of economic output. A spending slowdown in the first three months of the year was partly responsible for economic growth nearly stalling, climbing at just a 0.5% seasonally adjusted annual rate.

Economists say April's spending surge points to faster growth, as measured by gross domestic product, this spring. Forecasting firm Macroeconomic Advisers raised its expectation for second-quarter GDP growth to a 2.3% annualized advance from 2%. Barclays raised its forecast to 2.2% from 2%.

The Federal Reserve Bank of Atlanta's real-time estimate of economic growth moved Friday to a 2.8% gain, from the prior estimate of 2.2%.

If consumers can spur stronger economic growth in the coming months, that could influence the Federal Reserve's decision on when to raise its benchmark interest rate. After the Fed in December raised rates from near-zero, a choppy economic performance so far this year has led the central bank to delay a second increase. Policy makers next meet in mid-June.

"With diminished headwinds from abroad and consumers responding to growing household income and wealth, consumer spending should improve over the course of the second quarter," Boston Fed President Eric Rosengren said Thursday.

Large department stores were once bellwethers of consumer behavior, but there has been a clear and growing divergence in recent years.

Improved online sales is driving revenue growth at Blair Candy Co., said owner Pamela Macharola. The business has shifted from only supplying the region around its Altoona, Pa., warehouse to reaching a national customer base nostalgic for classic treats such as Lemonheads and Atomic Fireballs.

"We're doing very well and we attribute a lot of that to gas prices going down," she said. "When people feel good, and have more money at the end of the week, they're willing to spend."

But larger retailers seem to be struggling to make a similar pivot, even though they are getting an increasing amount of revenue from their own e-commerce operations.

Executives at Nordstrom, which gets 20% of its sales online, cited weak traffic to malls as well as aggressive discounting online for its slump. "There is a lot of excess product out in the marketplace. It's certainly easy to shop online. There is some heavy, heavy discounting going on, and we're seeing that effect in our business," said co-president Erik Nordstrom.

The global economy is ratcheting up price pressures as well. Consumer prices for apparel, homewares and other goods often imported from overseas have flattened or fallen due to a stronger dollar. In some cases that means retailers' margins shrink between placing orders and stocking their shelves, IHS economist Chris G. Christopher said.

Even higher-priced luxury retailers haven't been immune. Hudson's Bay Co. on Friday warned of weaker-than-expected sales for its recent quarter, dragged down by its Saks Fifth Avenue chain.

Foot traffic to apparel stores declined 7.2% in April, according to John Kernan, an analyst with Cowen & Co. And Nordstrom finance chief Michael Koppel said Thursday that "we continue to see traffic falling off in malls."

When shoppers do visit malls, they are increasingly spending money on entertainment such as movies and bowling and services such as hair salons and fitness centers, according to Liz Holland, chief executive of Abbell Associates, a real-estate redevelopment firm. Despite Amazon's rise, not all traditional retailers are struggling. Fast-fashion chains such as H&M Hennes & Mauritz AB have been posting strong sales recently, as have specialty retailers like Foot Locker Inc.

Amazon, meanwhile, continues to expand into new categories such as grocery and fashion. The web retailer's sales jumped 28% in the latest quarter, its fastest growth since 2012, and the company booked its fourth straight profitable quarter with expanded margins in its core retail business.

Analysts are expecting strong results this coming week from Home Depot Inc. and Lowe's Cos., which are benefiting from strength in the housing market. And off-price retailer TJX Cos. is expected to post sales increases as well.

But earnings from Wal-Mart and Target Corp. are likely to come under pressure from higher wages and ecommerce investments.

With the unemployment rate at a historically low level -- 5% in April -- and wages showing signs of increasing even beyond the retail sector, consumers are positioned to spend. But they remain cautious nearly seven years after the recession ended. Two-thirds of their outlays go to services, from rent to doctor visits to Netflix subscriptions.

"The consumer sector is the strongest sector in this economy," IHS's Mr. Christopher said. "Discount stores are doing well and online stores are doing well, but these department stores are getting just pounded."

Write to Eric Morath at eric.morath@wsj.com

(END) Dow Jones Newswires

May 14, 2016 02:47 ET (06:47 GMT)

Gap (NYSE:GPS)
Historical Stock Chart
From Mar 2024 to Apr 2024

Gap (NYSE:GPS)
Historical Stock Chart
From Apr 2023 to Apr 2024