By  on November 4, 2010

The two ends of the retail spectrum held up well in October, but the middle weakened, raising concerns about what holiday holds for midtier department stores and middle-income consumers.

The worries are manifold, ranging from consumer confidence to inflation. Five midmarket department stores — J.C. Penney Co. Inc., Kohl’s Corp., Dillard’s Inc., The Bon-Ton Stores Inc. and Stage Stores Inc. — all reported declines in their comparable-store sales results on Thursday, casting doubt on how they’ll perform in the retail year’s final quarter.

The middle-class customer, alarmed about economic conditions and worried about job security, is still holding onto her disposable income. That translated into poor sales of outerwear and sweaters during an unseasonably warm early October as shoppers postponed what the weather turned into nonessential merchandise.

“It’s still a struggle for the middle-income consumer. It could be a telling sign of a difficult Christmas for them,” said Keith Jelinek, director in AlixPartners’ global retail practice. “This consumer is disagreeing with the optimism out there among retailers. They are pulling back and being more cautious.”

According to Jelinek, this consumer will continue to wait for sales and specials “even more than last year.”

What’s more, consumers and retailers appear to be on a collision course as stores consider how to handle the certainty of higher costs next year because of escalating production, raw material and freight costs. Executives from both the retail and manufacturing sectors recognize it won’t be easy to pass these higher prices on to already-reluctant shoppers.

Retail performance in October bore a sharp resemblance to the days before the economic meltdown of 2008, when luxury results soared and middle-market stores suffered as consumers struggled with higher gas prices. With the stock market performing well, stores from Macy’s Inc. up to Nordstrom Inc., Saks Inc. and Neiman Marcus Inc. generated strong results last month and appear well placed to capitalize on the resurgent affluent consumer.

“That’s the sector that shows a revitalization in retail,” said Mike Moriarty, a partner of the retail practice at management consultant A.T. Kearney, who pointed to better-than-expected comps at publicly held Macy’s, Nordstrom and Saks, three companies that have sharpened their offerings, as well as their price points.

Wall Street continued to smile on investors Thursday as it further digested the midterm election results and the news the Federal Reserve Board would pump more money into the economy. The Dow Jones Industrial Average rose 219.71 points, or 2 percent, to 11,434.84, its highest closing level since Sept. 11, 2008, just before the markets imploded. The S&P Retail Index added 8.11 points, or 1.7 percent, to 481.26, its highest day-end point since May 3.

The day’s top retail performers included a number of stores with better-than-average sales performances, led by Zumiez Inc., shares of which rose 13.5 percent to $28.76 following its pacesetting 21.5 percent increase in October comps. The Buckle Inc. and Nordstrom saw shares rise 7.2 percent and 6.7 percent, respectively, following same-store sales increases of 2.6 percent and 3.4 percent.

“There’s no question about it — there’s significant market share competition going on in the department store sector,” said Kurt Salmon Associates retail strategist John Long, who explained luxury’s “resilience” is linked to the fact that its core customers “never traded down in terms of brands.” Instead, they just “bought less.”

Growth in the sector is due in part to easier same-store sales comparisons, as well as increasing confidence among those stores’ customers, he said.

And this growth shouldn’t be upended by higher sourcing and cotton costs, because high-end retailers will likely be able to absorb the increases, experts agreed.

“It may be too early to tell how the higher costs will impact retailers,” according to Weeden & Co. specialty retail analyst Amy Noblin.

Teen retailers, which generally rely more heavily on cotton for T-shirts, hoodies and jeans, could restructure their apparel offerings with different fabrics and blends, she said.

“It will all come down to pricing power,” Needham & Co. analyst Christine Chen said. “Pressure will be very company-specific.”

This could leave lower-priced, basics-oriented retailers, such as Old Navy, at a competitive disadvantage while those with more pricing elasticity, such as Abercrombie & Fitch Co., could prosper. “There’s cachet in that moose,” she said.

“There are a couple of big unknowns as we get into the new year,” said KSA’s Long, who pointed to other factors like taxes. “For retailers, it will be, ‘Reply hazy, try again later,’ when they look into the crystal ball.”

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