January exhibited the balancing act retailers face for all of 2011: keeping inventories lean, but not so low that they lose sales.
Unfortunately, many stores last month cut back too much — and the harsh winter weather didn’t help matters. The International Council of Shopping Centers said retailers logged a 4.8 percent jump in comparable-store sales, which generally bested analysts’ estimates of a 2 to 3 percent rise. But it was clear some stores went into the month light on inventory and came out on the other end light on sales.
According to MasterCard SpendingPulse, which estimates total U.S. retail sales made by cash, check or credit card, sales at department stores, excluding those at luxury price points, fell 5.3 percent, even as apparel overall jumped 6.2 percent — with an 8.1 percent increase in men’s wear balanced by a 3.4 percent rise in women’s apparel.
J.C. Penney Co. Inc.’s comps slid 1.2 percent, missing analysts’ expectations of a 1.8 percent increase, and Kohl’s Corp.’s 1.4 percent rise was a point shy of estimates.
“Inventories were too light,” said Citi analyst Deborah Weinswig. “It hampered sales. It’s what hurt Penney’s and Kohl’s sales.”
For Weinswig, it wasn’t product mix that harmed sales among midlevel players, as both Macy’s Inc., up 2.6 percent for the month, and Penney’s “seem to be pulling ahead in newness” with exclusive merchandise programs.
“Kohl’s seems to be less relevant,” she said. “I think consumers need to have a reason to part with their dollars.”
With the memory of a sharp decline in sales during the recession still fresh in their minds, retailers remain reluctant to take risks with big inventory buildups. They’ve been engaged in a balancing act between pushing for increases and minimizing the inventories needed to achieve them since consumer spending revived, albeit sporadically, last year.
That improvement has been weakest among teen retailers, which saw comps slide 2 percent last month, according to Thomson Reuters.
Liz Pierce, specialty retail analyst at Roth Capital Partners, pointed out in a research note, “January is traditionally a transitional month driven by gift card redemptions and clearance sales with the goal to clear as much carryover inventory as possible. However…we believe that relatively strong holiday sales likely cannibalized some of the traditional January clearance sales.
“That said, inventory levels remain lean and, therefore, promotional activity was not aggressive, with the exception of one privately held retailer (Anchor Blue) that has been running going-out-of-business promotions all month.”
Speaking of the teen segment, Sherif Mityas, a partner in A.T. Kearney’s retail consulting practice, noted, “It’s still a very crowded space,” Mityas said. “It will become bloodier in the teen space,” as stores like Uniqlo and H&M ramp up store expansion in the U.S.
That message wasn’t lost on American Eagle Outfitters Inc., Abercrombie & Fitch Co. and Aéropostale Inc., all of which reported monthly comps for the last time Thursday, with Abercrombie and American Eagle turning in comp decreases in excess of those expected and Aéropostale beating estimates with a 1 percent gain.
Analysts were critical of American Eagle, with several requesting anonymity, calling for a change in management, and one saying it needs to prove it’s not a “broken brand” to regain its status as a prime player, much less a “viable takeover target.”
“American Eagle has the middleman’s dilemma,” said FBR analyst Liz Dunn. Morgan Stanley's Kimberly Greenberger added that Eagle has “worthy competition in Abercrombie and Hollister,” both of which have used “promotional pricing to drive consumers.
“If Abercrombie promotes a bit less, then there is an opportunity for American Eagle to win back some of those customers,” but if Abercrombie “selectively promotes,” and finds creative solutions, then it will be more difficult, she said.
Turning around the brand won’t be easy, as retailers face a handful of economic headwinds in 2011, ranging from rising transportation costs, gas prices and commodity prices, as well as high unemployment and difficult same-store sales comparisons.
Abercrombie had largely excluded itself from the promotional cadence elsewhere in the teen market until last year.
Still, the results reported Thursday were greeted as good news in a variety of quarters, including Wall Street. The S&P Retail Index rose 6.34 points, or 1.3 percent, to 501.93, retaking the 500 mark after a one-day absence. Reflecting the close ties of the retail index to the same-store sales results, it easily outpaced the Dow Jones Industrial Average, up 0.2 percent to 12,062.26, and the S&P 500, up 0.2 percent to 1,307.10.
One of the strongest performers among retailers Thursday was Limited Brands Inc., which saw its shares rise 7.4 percent to $31.29 after it reported an industry-leading 24 percent surge in comps, led by a 35 percent eruption by its Victoria’s Secret division. “It’s really stepped up its game on merchandise. They have a good mix of merchandise online and in-store,” said A.T. Kearney’s Mityas of Victoria’s Secret.
Upscale retailers remained largely above the fray last month, with Neiman Marcus Inc., Nordstrom Inc. and Saks Inc. gaining 9.8 percent, 4.8 percent and 4.4 percent, respectively. But Citi’s Weinswig pointed out that the recent recovery in retail sales still hasn’t returned stores to their prerecession sales levels in many cases.
This year, Saks’ sales are expected to be $2.8 billion. In 2007, it raked in $3.3 billion. “We aren’t projecting for them to get back to that point until mid-2013,” she said. “That’s a long time.…There’s a reason that the dollar stores are doing as well as they are.”
Closing the books on the 2010 retail year, as most retailers have now done, the landscape appears more appealing than it did two years ago or even a year ago.
“Overall retail spending managed to keep a lot of momentum from holiday,” said Kamalesh Rao, MasterCard Advisors’ SpendingPulse director of economic research. “Apparel has been the sector that struggled to keep pace with the rest of retail” for most of last year.
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