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When even Wal-Mart Stores Inc. falls short of expectations, the depth of the consumer slowdown can no longer be denied.
This story first appeared in the January 9, 2009 issue of WWD. Subscribe Today.
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.
With discounts deeper and time to shop for the holidays running out, December did represent a slight improvement over November’s dismal results, said Frank Badillo, senior economist at TNS Retail Forward. “It’s encouraging that most retailers saw some improvement in their numbers compared with November,” he said. “These results provide signs that retail weakness may be bottoming out.”
That provided little consolation for better stores. Neiman Marcus Inc. had the worst results of all the retailers tracked by WWD, with comps down 27.5 percent during the month. Saks Inc. and Nordstrom Inc. declined 19.8 and 10.6, respectively.
“We are disappointed in our results and making every attempt to improve sales,” said Burt Tansky, ceo of Neiman Marcus. “It was the most difficult Christmas season we have been through.” However, “Our inventories are coming down and moving closer to demand and new spring deliveries have been arriving for the past six weeks.”
At Saks, Stephen I. Sadove, chairman and ceo, commented, “It’s a difficult environment and the luxury consumer is holding back on their spending.” He also noted that comparisons are difficult, too, considering that, a year ago, Saks posted double-digit growth. “The consumer is reflecting how they feel about net worth, the stock market, purchasing and holding back.”
On the positive side, he said Saks cleared out a lot of excess inventory and that people responded to more aggressive promotions: “Spring product is on the floor. We are well positioned. We have far less clearance on the floor than a year ago.”
While clearly not happy with the selling environment, Sadove did point out, “We feel very good where we are, relative to the capacity we have on our revolver [credit facility], the expense actions that we are taking and our ability to weather the storm.”
Saks has a $500 million revolving credit facility that’s only been modestly tapped and has a New York flagship that’s unencumbered. There are no short-term maturities of senior debt.
Still, it’s been a sobering end of the year for anyone dependent on upscale consumption.
“The consumer is trading down, away from luxury,” said Matthew Katz, managing director at Alix Partners LLC. “The top tier had further to fall because they had such high gains in previous years.”
Carla Casella, managing director of high yield research at J.P. Morgan, agreed, pointing to Neiman’s “miss” as “driven by slightly less promotional activity.” She added the retailer is “less of a holiday destination than its lower-end peers,” but said its liquidity is “solid” and expects the company to build on its cash during the quarter.
On Wall Street on Thursday, luxe names were hit the hardest among broadline retailers, with Saks’ stock down 5.2 percent to $4.19 and Nordstrom Inc. off 2.4 percent to $14.53. Gainers in the broadline realm included Dillard’s Inc., up 4.5 percent to $4.86; Kohl’s Corp., 4.2 percent to $39.33, and Target Corp., 1.4 percent to $37.52.
Investors were taken by surprise by both Wal-Mart’s profit warning and a more positive outlook from Sears Holdings Corp., calling for adjusted fourth-quarter earnings of $300 million to $380 million. Wal-Mart’s stock sank 7.5 percent to 51.38, while Sears’ was up 23.3 percent to 49.98.
Overall, the Standard & Poor’s Retail Index rose 0.8 percent, or 2.42 points, to 295.21, as the Dow Jones Industrial Average retreated 0.3 percent, or 27.24 points, to 8,742.46.
The strongest performer among the department stores was Kohl’s, which posted a 1.4 percent same-store sales dip, a by-product of last-minute pre-Christmas shopping and purchases made after the holiday, according to Kevin Mansell, president and ceo. Stage Stores Inc. said it had a 4.9 percent dip in comps, better than the 7.1 percent decline in December 2007, while its larger regional rival Dillard’s reported a 5 percent dip versus a flat December last year. The Bon-Ton Stores Inc. improved upon its 11.3 percent comp drop last year, putting up a 5.8 percent decline for the month.
Mall-based Buckle Inc., Aéropostale Inc., Hot Topic Inc. and American Apparel Inc. were the sole gainers among the apparel specialty stores, posting comp increases of 13.5, 12, 4.3 and 3 percent, respectively.
Even companies that don’t report comps on a monthly basis chimed in with downward revisions and words of caution.
J. Crew Group lowered fourth-quarter guidance to a range of a loss of between 24 cents and 29 cents a share from its earlier expectations of a profit of between 5 cents and 10 cents.
“I’m not going to say we’re not disappointed,” said Millard “Mickey” Drexler, chairman and ceo of J. Crew Group. “This has been an incredibly tough time for us, for retail and in general for most businesses in America. As difficult and challenging as business is, we have to keep this all in perspective. Business turned really difficult starting in the fall, and I don’t think anyone can say when it will get less so. We are shopkeepers who have to make certain we have, day-in and day-out, the right goods in the stores, online and in the catalogues, and that we are taking care of every single customer in the best way possible. We’re not sure when things will turn around. But I feel very good about our positioning in the marketplace when it in fact does turn.”
Late Thursday, Coach Inc. lowered its second-quarter earnings expectations to 67 cents a year, 10 cents below its previous guidance of 77 cents and 2 cents below its year-ago EPS.
Zale Corp. said that its comps dropped 13 percent in November and 22 percent in December.
Urban Outfitters Inc. reported that its corporate same-store sales were down 1 percent for the November-December period, with Urban’s 3 percent increase offset by declines of 6 percent at Anthropologie and 13 percent at Free People.
“While we are never happy to report negative comps, we believe our brands performed well given the extreme marketplace conditions,’’ said ceo Glen Senk. “The highly promotional selling environment forced us to take higher markdowns versus the comparable period last year, but we finished the holiday season with clean and lean inventories which are well-positioned for the spring selling season.”
American Eagle Outfitters Inc. posted a 17 percent decline, while rival Abercrombie & Fitch Co. posted a 24 percent dive in comps.
“Abercrombie’s management needs to be a bit more reactive in this environment,” said D.A. Davidson & Co. retail analyst Crystal Kallik. “We are in uncharted waters here.”
Kallik said the teen retailer’s inventory was up a “pretty significant amount,” a situation she deemed “dangerous.” Even though Abercrombie cleared out merchandise during the holiday season with promotions, the company is receiving new deliveries and has even begun marking up some new items, she noted.
Kallik said retailers that haven’t been able to clear through their merchandise in December are going to have a difficult time clearing it in the months ahead. She pointed to the numerous markdowns by West Coast-inspired Pacific Sunwear of California Inc., which posted a 10 percent drop in comps on Thursday and now expects to report a fourth-quarter loss of 38 to 43 cents a diluted share, including an estimated gain of about 10 cents a share from the sale of its Anaheim distribution center. The company said 19 cents of the loss was attributable to “markdown reserves.”
Gap Inc. registered a 14 percent comp decline, while Gap North America, Banana Republic, Old Navy and its international stores reported declines of 12, 15, 16 and 5 percent, respectively. However, unlike its cohorts, the retailer has been benefiting from leaner inventories and cost-cutting initiatives, said Barclay’s Capital retail analyst Jeff Black.
“Gap is just caught in place that top-line growth is going to matter more,” he said, explaining that, with already lean inventory, the focus is on revenue.
Missy apparel retailers Destination Maternity Corp (formerly Mothers Work Inc.), Caché Inc. and Cato Inc. reported comp declines of 6.9, 19 and 2 percent, respectively. Chico’s FAS Inc. finished December with a 12.4 percent comp contraction and also with a new ceo, former Tommy Hilfiger ceo David Dyer.
Among the specialty stores whose shares lost ground Thursday were J. Crew, down 9.2 percent to $10.61; Pacific Sunwear, 7.9 percent to $1.63; Zale, 7.6 percent to $3.75; Bebe Stores Inc., 6.8 percent to $6.18; Limited Brands Inc., 6.5 percent to $10, and Gap, 4.7 percent to $12.92. Those on the upswing included New York & Co., 11.7 percent to $2.49; Urban Outfitters, 10.4 percent to $15.46; The Men’s Wearhouse Inc., 5.8 percent to $14.16, and Charlotte Russe Holding Corp., 5.1 percent to $6.56.
As has been the case through the current recession, mass merchants and off-pricers performed best last month. BJ’s Wholesale Club Inc. excelled with a 5.9 percent surge in comps, versus a 3 percent increase a year ago, while Costco Wholesale Corp.’s comps slid 4 percent. Both Ross Stores Inc. and The TJX Cos. Inc. recorded flat comps, and Target Corp. said its same-store sales fell 4.1 percent.
“I think what we saw today gave us no insight,” said Black, commenting on when financials will improve for retailers. “Hopefully, the sky will be blue again. But I think the cat’s out of the bag on the fourth quarter.”