The dog days of summer lived up to their name at retail last month, further heightening the fears of analysts and investors about the holiday season ahead.
And while Wall Street expected a poor performance by retail in August, the financial markets recoiled at the news, sending the Dow Jones Industrial Average and the Standard & Poor’s Retail Index down more than 3 percent Thursday.
Despite falling oil prices and fresh fall merchandise, most retailers were scorched by their August results, with the majority reporting declines in comparable-store sales and none of the department stores tracked by WWD registering increases. In that sector, the high end got hammered like everyone else, with Neiman Marcus, Nordstrom and Saks Fifth Avenue all seeing comp-store sales declines.
Retailers saw sluggish sales that only began to pick up during the last 10 days of the month — just in time for kids throughout much of the U.S. to head back to school. Beset by growing unemployment, rising food prices and difficult credit and housing markets, consumers, uncertain if recent declines in gas prices would stick, generally headed to discounters for economical one-stop shopping, while department stores and specialty chains struggled.
Expectations going into Thursday’s same-store sales results were low, and weak comps did not alter that view. The combination of the poor start to the fall season and higher unemployment claims sent stocks into a tailspin as the Dow fell 344.65 points to 11,188.23, while the Standard & Poor’s Retail Index fell to 401.44.
“August was another in a series of weak months as the back-to-school season fizzled and the start of the fall fashion season got off with a resounding thud,” said Brean Murray, Carret & Co. retail analyst Eric Beder. “The only somewhat ‘saving grace’ was that Street expectations, for the most part, were also heavily muted.”
The fact that consumers shopped late in the month was no surprise, according to Pali Capital Research analyst Amy Noblin, citing a close-to-need shopping pattern that is expected to be evident for holiday as well. Retailers might try to blame weak sales this holiday season on a truncated window of time between Thanksgiving and Christmas, but don’t be fooled, Noblin said.
“Regardless of how much we all want to try to make out of the fact that there’s five fewer days between Thanksgiving and Christmas, the reality is, I think consumers will be shopping late,” she said. “They’ll be shopping for discounts. It’s a pattern we continue to see.”
August proved her point.
Discounters again led the pack, with Wal-Mart Stores Inc. generating a 3 percent boost, excluding fuel, that surpassed the 1.6 percent gain expected. Indicative of a strong b-t-s season at the world’s largest retailer, the company said denim products and licensed apparel were among the month’s standouts.
B.J.’s Wholesale Club Inc. posted a 15.4 percent gain in comps, up from a 1.4 percent rise last year. Costco Wholesale Corp. just missed double-digit honors, and analysts’ expectations, with a 9 percent jump, while Target Corp. sank 2.1 percent, which new chief executive officer Gregg Steinhafel characterized as “in line with our planned range.” It was Target’s second consecutive month of comp declines following a 0.4 percent increase in June and added to a growing number of months in which Target’s performance has fallen short of its rival discounter.
“Any growth is really going to the discounters, towards the big box guys, and it has been [going to them], and this is no exception,” said Moody’s Investors Service senior analyst Ed Henderson. “Still, in all this is just a continuation of what we have been experiencing the last year. The economy is tough and the consumer is absolutely pulling back the spending, and back-to-school is no surprise.”
Henderson said falling oil prices probably had little effect on spending. Noblin agreed, adding that perhaps declining oil prices offset the effects of the end of benefits from government-issued rebate checks from earlier in the summer, creating a similar trend.
“I continue to think unemployment and consumer credit are bigger pressures on discretionary spending than oil. No doubt lower oil prices will put money back in consumer’s pockets, but whether or not you have a job and access to credit, I think are bigger factors,” said Pali’s Noblin.
The month was especially hard on department stores, with the largest decline coming from Gottschalks Inc., which posted an 11.1 percent drop in comps, followed by The Bon-Ton Stores Inc. with a 10.3 percent decline. Bon-Ton said poor comps were due in part to weak results in women’s and men’s apparel and furniture, which was offset by better results in children’s, cosmetics and accessories.
“Business did improve in the final week of the month, but we will look to September to get a better read on fall trends,” said Tony Buccina, vice chairman and president of merchandising.
Among upscale department stores, Neiman Marcus Inc. came closest to the break-even point with a 0.4 percent decline in comps. Neiman’s said precious jewelry and better women’s apparel were its strongest classifications. Nordstrom Inc. was off 7.9 percent during the month, with full-line stores down 12.5 percent and Rack units up 7.6 percent. Weighed down by disappointing results in women’s wear and footwear, Saks Inc. trended down 5.9 percent, with jewelry and fragrances helping it to avoid an even larger dip.
Dillard’s Inc. dropped 7 percent and, on Wednesday, midtier merchants J.C. Penney Co. Inc. and Kohl’s Corp. reported same-store declines of 4.9 percent and 5.8 percent, respectively. Value retailer Stein Mart Inc. was down 9.9 percent, versus a 5.2 drop in comps last August.
Moderate department stores got hit much harder, much earlier, and they are now facing somewhat easier comparisons than some upper-end merchants, said Thomas Weisel Partners retail analyst Liz Dunn. She added that this led them to control their inventories and expenses earlier and slow capital spending. Conversely, she said, the high end is currently seeing “deterioration,” which is why more promotions are being rolled out.
Home business has also been weak across the board, said Citigroup retail analyst Deb Weinswig, and makes up roughly 20 percent of department store sales.
“Housing turnover is still down double digits,” Weinswig said. “If people aren’t buying new homes or aren’t thinking about selling their existing home, then they’re not fixing up their homes, so that’s been a huge issue in regards to the sales of home merchandise.”
Specialty retailers fared slightly better, but not much.
Thursday’s big winners were American Apparel Inc. and teen retailers Aéropostale Inc. and The Buckle Inc., which pushed back with soaring comps of 31, 13 and 25.9 percent, respectively.
“I think Aéropostale is benefiting from two things,” noted Pali’s Noblin. “Number one: their product assortment is better. Number two: customers are trading down. The fact that their product assortment is better, makes that trade-down decision easier.”
Noblin said retailers like Buckle and American Apparel benefit from “unique, nichey” assortments.
“When you’ve got very unique merchandise where retailers are still able to command a price for that,” she said.
Gap Inc. was down 8 percent as Gap North America, Old Navy, Banana Republic and international comped lower by 5, 9, 14 and 2 percent, respectively. Abercrombie & Fitch Co. dropped 11 percent, with its flagship brand’s 5 percent decline pitted against double-digit dips of 14, 17 and 25 percent at the Hollister, Abercrombie and Ruehl divisions, respectively.
“Abercrombie & Fitch has been committed to maintaining a full-price business, and I think they are suffering because of it,” said Thomas Weisel’s Dunn. “They also have relatively high prices, and they are not going to discount, so their comps are suffering.”
Pacific Sunwear of California Inc. was down 6 percent, slightly less than expected, on poor accessories results, compared with a 9.6 increase in comps last year.
Women’s apparel retailer Chico’s FAS Inc. was off 10 percent for the month, compared with a 9.3 percent dip last year, while The Wet Seal Inc. turned in a larger than expected 8.7 percent drop, versus a 1.7 percent gain in 2007.
American Eagle Outfitters Inc. and Hot Topic Inc. reported August same-store declines of 5 percent and 2.7 percent, respectively, late Wednesday.
Piper Jaffray retail analyst Jeffrey Klinefelter said that back-to-school was off to a slow start, but that Hot Topic is “tightly controlling inventory and store level expenses to mitigate the deleveraging effect” in response.
Zumiez Inc. posted a 0.2 percent increase on Wednesday, compared to a 17.4 percent leap in comps last year.
“Footwear and skate hard goods have been positive contributors year-to-date,” said Klinefelter, “and are expected to remain so going into the back-to-school and holiday selling seasons.”
Klinefelter said that while b-t-s got off to an “adequate start,” it is really just beginning, making September the month to watch. Looking beyond, the “best-case scenario” for the holiday season is that it will be similar to last year, he said, adding that what’s more likely is that sales will be down slightly from 2007.
“No one really can tell when this is going to end,” said Moody’s Henderson. “But I think it’s going to be rough well into 2009.”
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