Published: Aug 05, 2010 1:33 PM EDT
Updated: Aug 06, 2010 4:30 AM EDT

NEW YORK (AP) — Deep discounts on summer leftovers and hot weather drove shoppers into malls in July, but they remained choosy, resulting in only overall modest gains.

The sluggish spending, which is being compared with a miserable July 2009, bodes poorly for the back-to-school season as Americans step up saving amid a stalling economic recovery. For shoppers, it could mean big discounts. Already, teen clothing sellers like Abercrombie & Fitch are offering generous price cuts on new jeans to lure shoppers.

Chain-store sales rose 2.8 percent in July, below the 3 to 4 percent expected, according to The International Council of Shopping Centers, based on reports from 31 retailers. That compares with a 5 percent drop a year ago. The figure is based on revenue at stores opened at least a year and are considered a key indicator of a retailer's health.

With shoppers keeping a lid on spending, sales gains are coming at the expense of other retailers. Clearly, July's reports showed clear winners and losers as shoppers try to buy the right product at the right price.

Macy's Inc. posted a stronger-than expected revenue increase, but rival J.C. Penney Co. suffered a surprise drop, missing expectations. Penney warned that it second quarter will come at the low end of its previous forecast, sending shares down.

Macy's CEO Terry Lundgren said that the back-to-school business was off to a "great" start, helped by its newly launched Material Girl fashion collection created by pop star Madonna and her 13-year-old daughter, Lourdes.

Another big winner was Limited Brands Inc., operator of Victoria's Secret and Bath and Body Works, which posted robust gains.

Teen clothing stores were among the hardest hit, with The Buckle Inc. and The Wet Seal Inc. suffering declines. But analysts say that deep discounting from Abercrombie & Fitch and American Eagle may have hurt Aeropostale Inc., which since the recession has been a bright spot because of its own lower prices. Aeropostale posted a slim increase, missing analysts' expectations and trimmed its guidance.

The problem is that the Great Recession has taught shoppers to buy closer to when they need the merchandise. So Ken Perkins, president of research firm RetailMetrics, predicts stores are "going to have to be very promotional all the way through."

He added that consumers, particularly in the low- to middle-income brackets, are in a "buy now, wear now" mode because they don't have a lot of discretionary income.

Retailers are "becoming a battleground for market share," said John Long, retail strategist at Kurt Salmon Associates. "And because consumer wallets are not growing, the battle is for every dollar they spend."

July marks the fourth straight month of weak spending after retailers got a surprise bounce earlier in the year amid a rising stock market and government incentives. But now confidence is falling. An unemployment rate that's still stuck at almost 10 percent and tight credit are making shoppers focus on saving more and being picky about what they buy.

July marks the end of most retailers' fiscal second quarter. But it's the least important month in the quarter because stores use it to clear out summer leftovers and bring in fresh fall merchandise. This year, stores had to discount more than they had planned in June and July on summer items to pull in recession-scarred shoppers.

It's still too early to get a read on back-to-school season, retailers' second-largest behind Christmas, because goods just started hitting the floors in the past two weeks. But the big discounts on jeans (50 percent off at Aeropostale, for example) are already signaling that spending will remain weak. If discounting gets more frenzied, that will be a bad omen for third-quarter profits.

Wal-Mart Stores Inc., the world's largest retailer, no longer reports monthly figures.