One of the biggest question marks surrounding the sustainability of the economic recovery is the strength of the American consumer. Buyers were understandably shell-shocked by the recession, as tumbling home prices, increased insecurity, higher unemployment, and tighter credit kept wallets slammed shut. Given this environment, it is hardly surprising that consumer spending plummeted, and retailers were scrambling to move unsold inventories by offering huge promotions.
With many major retailers reporting earnings last week, how is the sector holding up a year after spending took its nosedive? For the most part, retailers are on more stable ground. Consumers are clearly still seeking out value over luxury and are not yet making the big splurge, but the big reluctance to buy (save for the bare essentials) seems to be fading. At the same time, retailers have made great strides in inventory management and have cut back on expensive store remodeling and expansion plans. This has helped keep profitability from faltering even further as sales remain depressed.
Senior retail analyst Kim Picciola saw lean inventories as an important driver of Kohl's (KSS) third quarter. The operating margin was 8.4% compared with 7.5% in the year-ago quarter, driven by solid inventory management, greater penetration of private-label goods, and the leverage of fixed costs on higher sales. The firm even had same-store sales growth, as its value proposition has been resonating well with consumers.
Wal-Mart (WMT) also was able to drive impressive margin growth in the quarter, according to retail associate director Joel Bloomer. The nearly 70-basis-point operating margin improvement was driven by lean inventories and greater corporate efficiency. But sales growth slowed to 1.1% as slow growth at Wal-Mart U.S. and international was partially offset by a small decline at Sam's Club, which lost 2% because of tough gas price comparables, a problem that should disappear next quarter. Comparable-store sales in the United States overall were down slightly, primarily because of a 50-basis-point drop at Wal-Mart U.S.
