By and and and  on January 8, 2009

When even Wal-Mart Stores Inc. falls short of expectations, the depth of the consumer slowdown can no longer be denied.

Such was the case in December, a month in which same-store sales came in for retailers just as advertised, a dispiriting coda for the toughest holiday season in more than a generation. While every sector tracked by WWD declined, department stores were hit particularly hard, and high-end stores such as Neiman Marcus and Saks hardest of all.

And although revenue results and month-end inventory levels were in some cases a bit better than anticipated, these sources of solace came at the expense of margins, auguring ominously for fourth-quarter and year-end earnings that will be reported beginning next month.

The one surprise was that Wall Street took the retail beatings relatively in stride, with the Standard & Poor’s Retail Index rising for the day even as the Dow Jones Industrial Average fell.

Wal-Mart, until now one of the few beneficiaries of consumers’ recent aversion to shopping and acquisition in general, not only fell short of comparable-store sales expectations, posting a 1.7 percent advance in its U.S. stores, excluding fuel, versus analysts’ estimates of a 2.8 percent pickup. But also, concern about the performance of its Sam’s Club stores and international operations, coupled with the recent settlement of 63 class action wage and hour lawsuits, led it to reduce its fourth-quarter earnings guidance for continuing operations to a range of 91 cents to 94 cents a share, down from its earlier projection of $1.03 to $1.07.

Apparel and jewelry were cited as particular soft spots for the world’s largest retailer.

Lowered earnings guidance went hand-in-hand with cuts in store counts and jobs for many stores. Macy’s Inc., which recorded a 4 percent dip in comps, said it would close 11 underperforming department stores. Discounter Stein Mart Inc., with December comps down 8.5 percent, said it would eliminate over 200 jobs and reduce salaries of remaining managers by 5 percent. New York & Company Inc., which doesn’t report monthly comps, said it would eliminate between 40 and 50 of its 600 stores.

Terry Lundgren, chairman, president and chief executive officer of Macy’s, said, “With our business coming in at minus four, we would never feel good about negative results, but it looks like we are taking market share from our competitors. It’s obviously a very challenging time. We expect it to be challenging going forward. But we have done a terrific job of getting inventories in line with lower than expected sales,” 7.5 percent lower than last year at this time. The company is also forecasting over $1 billion in cash on its balance sheet at the end of the year, versus $583 million at the end of fiscal 2008.

“We’ve had too much supply, too much inventory, too many stores,” Lundgren continued. “We are very focused on getting supply and demand back in line again.…We will get our inventories down very tight and in fact it will be the opposite of what we had in the last six months. We’ve all been scrambling to reduce orders. We will get to the point where we will be scrambling to increase orders. Inventories will be lean and that’s a good way to make money, a good way to raise margins, and a good way to improve sell-throughs.”

Regarding markdowns, Lundgren said prices will continue to be sharp. “Consumers will benefit, but I think retailers like ourselves will do a better job of planning for it now as opposed to just reacting,” he said.

Last year, he noted, customer demand fell off faster than anybody anticipated, leaving stores stuck with overinventories. “That’s going to change in the first half in 2009. Inventories are much more in line, so there’s less of a need to mark the inventory down, just to get them down.” Markdowns will become “more strategic, rather than rampant to reduce inventories. There will be less of a panic and more of an orderly process.”

Lundgren described the 11 store closures as part of a “regular pruning process.” He noted that last year eight units were closed. About half of the closings are in older malls and not far from newer malls where there are also Macy’s stores, which should gain some business from the closings.

The 11 Macy’s stores to be closed range in size from a 3,000-square-foot shop in the Mauna Lani Bay Hotel in Hawaii to the 210,000-square-foot unit in the Bellevue Center in Nashville. Two stores in Colorado and Pennsylvania and single units in California, Florida, Indiana, Minnesota and Missouri are also affected. A total of 960 jobs will be lost. Macy’s expects costs for the closures to total $65 million, about $12 million of that sum in cash, and the majority of these to be accounted for during the current fourth quarter.

But the closings added to the concern about escalating job losses. In a statement endorsing both a new stimulus plan from Washington and Congressional approval of the Employee Free Choice Act, Stuart Appelbaum, president of the Retail, Wholesale and Department Store Union, commented, “In the wake of the worst holiday shopping season since the Great Depression, Macy’s Inc.’s decision to close 11 stores — at a cost of almost 1,000 workers’ jobs — is only a harbinger of what’s to come. But now it’s no secret that what’s happening in the retail industry is far different from the cyclical downturn retailers have seen in the past. Against the backdrop of the collapsing housing and credit markets, even unprecedented holiday discounts failed to revive what were already sagging sales. In 2008, roughly 148,000 stores closed their doors before the holiday shopping season even began. In November alone, 91,300 retail jobs were lost.”

Across-the-board promotions that began as early as October couldn’t save Christmas for most retailers this year, as consumers pinched pennies and curtailed holiday shopping in the face of frightening financial and job data.

“Even with all the discounting, retailers didn’t see that pop because everyone was doing it,” said Stephen Hoch, Wharton School marketing professor and director of the Baker Retailing Initiative, explaining why even mass merchants like Wal-Mart were seeing a comp slowdown. “The discounting all canceled itself out.”

The mantra for today’s retailer is “gotta cut, gotta cut, gotta make sure I don’t hit a main artery,” said Hoch, who added that the companies emerging from the current economic slowdown will do so with their brands intact, even if their scope is smaller. This will entail closer management of promotional activity, which was “widespread” during the holiday, he said.

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