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September Sales Chill Holiday Outlook

Shoppers gave stores the cold shoulder in September and the chill might extend into the holiday season. Unseasonably warm temperatures and a difficult year-over-year sales comparison took a toll on September same-store sales.

Shoppers gave stores the cold shoulder in September and the chill might extend into the holiday season.

Unseasonably warm temperatures and a difficult year-over-year sales comparison took a toll on September same-store sales. Merchants had a product mix oriented toward cool weather apparel, now they are faced with overstocks of fall merchandise and will have to clear out that product with markdowns to make room for holiday. Those clearance sales will eat away at gross margins and the bottom line.

Jump to September Same-Store-Sales Chart

The mass merchant channel delivered the strongest results among companies tracked by WWD, with a sector average of a 0.4 percent gain. Department stores showed an average decline of 1.7 percent and specialty chains were down 2.3 percent.

Nordstrom Inc., Target Corp., Kohl’s Corp., J.C. Penney Co. Inc., American Eagle Outfitters Inc., Limited Brands Inc., Stein Mart Inc., The Cato Corp. and Children’s Place Retail Stores Inc. all warned that third-quarter earnings could be lower than expected as a result of soft results in September.

Nordstrom lowered third-quarter earnings predictions to 50 to 53 cents a share from prior estimates of 61 to 64 cents. American Eagle revised earnings guidance to 44 to 45 cents a share versus previous guidance of 47 to 48 cents. J.C. Penney now expects earnings per share between $1 and $1.04 versus previous estimates of $1.28 per share.

In contrast, Wal-Mart Stores Inc. raised its forecast based on lowered costs.

“We’ve been talking all along about a softer 2007 from a retail standpoint across all businesses,” said Kevin Regan, retail specialist and senior managing director, FTI Consulting. “I don’t see a change in that. I see a continuation in performance in the specialty and department stores that is below last year.”

Despite the housing slump, high fuel costs and tighter credit, Regan said consumers remain resilient. Personal spending decisions are based less on the economy at large and more on personal circumstances. Those circumstances, however, could also include higher mortgage payments (foreclosure filings doubled in September), rising credit card fees, and higher food and commodity prices. The big question is whether shoppers will seek “retail therapy” this holiday.

This story first appeared in the October 12, 2007 issue of WWD.  Subscribe Today.

“September is usually a good indication of what the Christmas season will look like,” said Brian Girouard, global leader of consumer products and retail, CapGemini.

“Warm weather no doubt explains part of the chill in September sales, but shoppers are also clearly telling us they want to hold the line on spending,” Frank Badillo, director of the Retail Forward KnowledgeBase and Senior Economist for TNS Retail Forward, said in a statement. “That was the case for back-to-school spending and shoppers are also cutting their plans for Halloween and the holidays.”

Some other trend-watchers, however, said they expect consumers to resume spending. “American households may have taken a bit of a breather recently, but as the more savvy off-mall retailers know, today’s ‘circumspect consumers’ will soon rebound just as they have in the past. As long as jobs and incomes keep growing, the American shopper will bounce back in time for the holidays,” said Craig Johnson, president of consumer and research consultancy Customer Growth Partners, in a statement.

The International Council of Shopping Centers said September same-store sales grew 1.7 percent on a year-over-year comparison for U.S. chain stores. Michael Niemira, the ICSC’s chief economist, said the pace of consumer spending has not been fundamentally altered since February. He sees that trend continuing.

Archstone Consulting projected a 3 percent increase in 2007 holiday sales, which would barely keep pace with the projected inflation rate of 2.7 percent. The 3 percent forecast represents the slowest growth rate in retail holiday sales over the last five years.

“Retailers will see limited growth in holiday spending, resulting in a ‘season of discounts’ that will reward savvy shoppers,” said Dave Sievers, team leader for Archstone’s retail and consumer products practice, in a statement.

The NPD Group said 41 percent of the respondents to its Annual Survey of Consumers’ Holiday Purchase Intentions 2007 said they don’t expect to start holiday shopping until after Thanksgiving — 10 percent higher than last year.

“I spotted the first holiday setup in a store on Aug. 18 this year…that’s nearly a month earlier than last year,” NPD chief industry analyst Marshal Cohen said in a statement. “Retailers are looking to start the season earlier, but consumers just aren’t ready. The hesitation comes in because there isn’t that one must-have item coupled with the fact that consumers are conditioned to expect deeper discounts as it gets later in the season.”

However, the National Retail Federation said holiday setups at many retailers are shifting later, into the first two weeks of October versus September last year. The NRF predicted 4 percent growth this holiday season to $447.5 billion versus growth last year of 4.6 percent. This year’s estimate is the lowest since 2002, but the group added that given economic conditions, a consumer spending increase of 4 percent is still moderate.

Consumers could be tempted to spend money before Thanksgiving if offered enough incentives, said Stephen Hoch, professor of marketing at the University of Pennsylvania’s Wharton School of Business and director of the Jay H. Baker Retailing Initiative.

“Consumers are strategic, they are looking for a deal,” he said. “If retailers give them a reason to come in, they will. Some people will postpone [holiday shopping] but retailers will take actions that will prompt people to come into the stores.”

With no new “must-have” trends on the horizon for fall or holiday products, even outside the apparel sphere, consumers will be more likely to be swayed by what retailers are offering, Girouard said. “People will be shopping with their eyes open towards what retailers are promoting versus having something specific in mind when they go to the store.”

The new trend this year is the arrival of products melding technology and fashion, experts said. They range from new pockets to accommodate cell phones and iPods to clothing that can change shape at the touch of a button.

Beyond that, dresses, three-quarter-length coats, boots, the color gray, sweaters, ladylike accessories, rustic luxury, natural or ecologically minded products and denim continue to drive sales.

Some retailers were reluctant to make predictions about the holidays.

Aéropostale Inc. declined to discuss current numbers on holiday but, in comments during a recent conference call, Mindy Meads, president and chief merchandising officer, said the company was “experiencing strength in fleece, knit tops and denim for back-to-school and these will continue to be drivers of our holiday business.”

Sabrina Simmons, executive vice president of Gap Inc. finance, said in a statement: “Our merchandise margins in September were in line with last year and we are comfortable with our inventory levels, which we continue to manage tightly heading into the important holiday season.” Gap declined to discuss holiday expectations.

TJX Cos. Inc. said it has not provided formal guidance for December. “We’ve got great gift-giving initiatives in place and events planned, in addition to creative, hard-hitting marketing,” said a company spokeswoman. TJX Cos. beat consensus estimates of 1.3 percent when it reported a September comps gain of 2 percent.

Despite warning of lower than expected third-quarter earnings, J.C. Penney chairman and ceo Myron E. Ullman 3rd, said in a statement: “We believe customers will continue to respond well to calendar-related or ‘appointment shopping’ events. For the upcoming holidays, we believe that we are well-positioned with our merchandise and promotional events to reinforce for our customers why we should be their preferred choice.”

Target chairman and ceo Bob Ulrich said the company had lowered its full-year earnings per share estimate to less than $3.60. Target reported a 1.2 percent increase in September sales, missing consensus estimates and its own downward revised guidance.

Wal-Mart was up 0.8 percent, missing projected targets, but the company raised its guidance for the fourth quarter to 69 cents a share from 66 cents. The forecast sent stocks into a rally, but major indices declined later in the day because of woes in the tech sector.

Elsewhere in the mass merchant sector, the clubs performed well. BJ’s Wholesale Club Inc. and Costco Wholesale Corp. turned in comps gains of 3.9 and 4 percent, respectively. Ross Stores Inc. was flat. Stein Mart Inc. was the only store in the sector to report a decline, down 9.1 percent.

In the department store sector, Saks Inc. and Neiman Marcus Group Inc. reported comps growth but almost all the other department stores posted declining numbers for the month, including Macy’s Inc., which was down 2.7 percent. Other retailers that reported negative same-store sales included J.C. Penney, down 4.6 percent, and Kohl’s, which dropped 3.2 percent.

Nordstrom reported a comp increase of 3.2 percent for the month, lower than consensus expectations of a 4.9 percent increase. “While we did experience positive same-store sales growth, we did not achieve our plan,” Blake Nordstrom, president, said in a statement. “In addition, we entered the quarter with inventory levels above our plan and our below-plan sales performance put additional pressure on inventory levels. We are taking immediate action to bring inventory levels in line, which will negatively impact merchandise margins.”

At Saks, the categories that performed the best in September included women’s shoes, designer sportswear, evening dresses, fragrances and intimate apparel. Outerwear and soft accessories were among the worst performing categories.

In the specialty sector, Zumiez Inc. reported a 12.9 percent increase in September comps and Aéropostale was up 1.3 percent. Among other teen retailers, results were weaker. Abercrombie & Fitch Co. and American Eagle both reported drops. The Gap Inc. banners — Gap, Old Navy and Banana Republic — all reported declines.

American Eagle lowered its outlook for the third quarter to 44 cents a share from 45 cents a share. Previously the company said it anticipated earnings of 47 to 48 cents a share.

Negative same-store sales growth was reported at Limited Brands, Victoria’s Secret, Chico’s FAS Inc. and Cato.

“September comp store sales are necessary to build a credible forecast for the holiday, and we now have confirmation that initial markups on fall transitional and fall fashions will come in well below budget, so earnings guidance is coming down across the board,” said Richard Hastings, analyst, Bernard Sands.

— With contributions from Vicki M. Young and Jeanine Poggi


SEPTEMBER SAME-STORE SALES
SEPTEMBER AUGUST JULY
2007 2006 2007 2007
% Change % Change % Change
DEPARTMENT STORES
Bon-Ton -7.1 -5.7 1.3 -7.6
Dillard’s -7.0 -1.0 -5.0 -6.0
Macy’s -2.7 3.8 2.4 -1.4
Gottschalks -3.9 -1.1 -7.8 -3.9
Kohl’s -3.2 5.2 -0.6 0.0
Neiman Marcus 6.0 4.4 4.6 8.3
Nordstrom 3.2 7.1 6.6 9.4
J.C. Penney -4.6 -0.5 -4.0 10.8
Saks 7.7 5.0 18.2 14.9
Stage Stores 2.3 11.0 -2.6 -1.7
Average: -0.9 2.8 2.3 2.3
 
SPECIALTY CHAINS
Abercrombie & Fitch -4.0 6.0 6.0 -4.0
Aeropostale 1.3 3.3 1.7 -11.9
American Eagle -2.0 11.0 9.0 -6.0
Ann Taylor 0.5 1.9 2.9 -5.0
Banana Republic -2.0 2.0 7.0 1.0
Bath & Body Works -2.0 13.0 1.0 -2.0
Buckle 10.9 -8.5 16.7 7.6
Cache 3.0 -3.0 7.0 6.0
Cato -7.0 4.0 2.0 -5.0
The Children’s Place -3.0 12.0 5.0 -1.0
Chico’s FAS -8.3 -2.6 -9.3 -6.7
Christopher & Banks 1.0 5.0 2.0 4.0
Deb Shops -3.8 -7.7 0.2 -2.0
Gap (U.S. stores) -10.0 -11.0 2.0 2.0
Hot Topic -2.9 -6.0 -1.1 -7.4
Limited Brands -4.0 -5.0 1.0 10.0
Mothers Work -7.0 5.0 -3.7 -9.4
Old Navy -8.0 -8.0 -4.0 -18.0
Pacific Sunwear 2.7 -9.4 9.6 -4.6
Rite Aid 0.7 3.8 1.0 1.6
United Retail -8.0 3.0 -7.0 -6.0
Victoria’s Secret -6.0 18.0 0.0 -4.0
WalgreenS 4.7 8.5 6.5 7.2
Wet Seal -7.0 8.7 1.7 -7.2
Wilsons -13.0 -18.5 -0.2 -2.2
Zumiez 13.9 4.7 17.4 9.7
Average: -2.3 1.2 2.9 -2.1
 
MASS MERCHANTS
BJ’s Wholesale Club 3.9 2.3 1.4 1.5
Costco 4.0 5.0 2.0 6.0
Ross Stores 0.0 6.0 4.0 1.0
Stein Mart -9.1 -2.8 -5.2 -3.4
Target 1.2 6.7 6.1 6.1
TJX Cos. 2.0 4.0 4.0 5.0
Wal-Mart (discount stores) 0.8 1.5 2.8 1.3
Average: 0.4 3.4 2.2 2.5
 
Tally:
Up 24 28 30 20
Flat 1 0 1 1
Down 18 15 12 24
Total 43 43 43 45
 
SOURCE: COMPANY REPORTS