On Retail Sales - should we be surprised?

The retail sales that came out this morning were disappointing to some and shocking to others. They were not surprising to me. If anyone has been paying attention, it should be clear that sales at major retailers still remain subdued. The comps have not really recovered in April and traffic and sales are still mostly driven by aggressive price discounting. Consumers remain fickle and few are spending frivolously, but good deals still get customers into the stores. Speaking of deals, if you walk around your local mall, you will see the discounting has become less prevalent, as retailers have aggressively paired their inventory. Most stores look much cleaner in terms of merchandise and retailers are slowly moving back to full price selling. Does this hurt retailers? Some are clearly going to be affected more than others, but in general, many retailers took a tremendous amount of cost out, pairing their SG&A expenses significantly. This helped earnings in Q1, so despite weak comps and top line results, many were able to meet or exceed EPS expectations. While many retailers stillhave little visibility into sales in the second half, many are comforatble with thier earninsg guidance, which in some cases assumes no recovery in sales. The next level of contribution should come from the decrease in raw materials and improved pricing from suppliers. Think how much more negotiating power retailers have with Chinese factories struggling to remain open. Other input costs like energy, transportaton and logistcs, etc have also come down relative to where they were last year. This should provide some lift to gross margins in the 2H. Combining lower cost of goods and lower SG&A should provide a tremendous operating leverage for some of this retailers when sales rebound even a little bit. How much of these savings will they pass on to consumers? Having this flexibility to drive sales without completely detroying thier profitability, provides retailers with a lever to offer more discounting. Well, if the push comes to shove, expect to see more discounting and promotional activity to drive salesBut for now, I think the retail sales will remain a volitle metric and one difficult to predict.