October comps blew hot and cold as department stores sizzled and some specialty retailers fizzled because of their fashion mix, but the surprise was Wal-Mart's forecast of flat November sales in the walk-up to the holiday season.
The world's largest retailer, hurt by store renovations and lackluster apparel sales, is on track for its worst monthly performance in more than 10 years — even as chief executive officer H. Lee Scott told analysts in October that the company was getting back to basics and predicted better holiday sales.
While Wal-Mart's previously announced 0.5 percent total comps gain and outlook pushed shares down 56 cents to close at $48.29 in the fifth consecutive day of declines, the department store channel was driven by strong performances at Nordstrom, J.C. Penney, Saks Fifth Avenue, Neiman Marcus, Federated and Kohl's. "It's almost a tale of two cities,'' said Donald Soares, a principal in CapGemini's Retail Practice. "The discount stores, Wal-Mart and Target, have been disappointing, whereas the department stores have had a very strong, surprisingly strong, showing,"
The department store segment tracked by WWD increased a total of 3.1 percent, and the segment emerged as a clear winner, several analysts said. Penney's sales in stores open at least a year were up 8.1 percent, and Federated climbed 7.7 percent after a 6.2 percent increase in September. Saks comps rose 9.2 percent, and Neiman Marcus reported a boost of 6.5 percent. Kohl's more modest 4.2 percent gain came off the toughest month-to-month comparison, up 16.3 percent in September.
Nordstrom's 10.7 percent jump, which was above company expectations, was propelled by increases across all its geographic areas, the company said. The chain reported double-digit growth in many merchandise categories, including women's intimate apparel, women's shoes, designer women's apparel and accessories.
"A couple of years ago, everyone wrote off the entire department store sector, but it's really come back with a bang thanks to very careful restructuring," Soares said.
Specifically, he pointed to Federated's successful efforts to create a national brand with Macy's following the acquisition of May Department Store Co. Federated has been running a national campaign and aggressive promotions in its stores in categories like apparel and furniture, he said.The International Council of Shopping Centers said chain-store sales in general increased 3 percent in October on a year-over-year basis. Both September and October of this year continued to show a shift in where consumers shopped — moving toward department stores, the ICSC said.
"The department store sector was ‘hot' in October, with sales growth slightly in excess of two percentage points above its year-to-date performance," said Michael Niemira, ICSC's chief economist and director of research. "However, surprisingly, the segments that were most sensitive to gasoline prices did not get the lift that might be implied by the recent price declines, which boosted consumers' discretionary spending power. Over the next few months, we will be watching to see if this trend continues."
Discounters have had to play catch up with the department stores, analysts said. Wal-Mart attributed its disappointing October figures to the renovations in 1,800 U.S. stores and softer-than-expected sales in women's apparel. And while analysts said it's possible Wal-Mart may no longer be the retail bellwether that it had been, any stumble by the $312 billion company makes the market take notice.
Richard Hastings, analyst with Bernard Sands, said he will become concerned with Wal-Mart's performance if comps don't rise above 1 percent for three or four months in a row. The company's same-store sales increased 1.3 percent in September, compared with 6.7 percent for rival Target.
"If we see that scenario beyond December and January, I think it's reasonable to expect earnings growth to come down," Hastings said. Wal-Mart added an estimated $50 million in sales from North America in October alone, keeping momentum in earnings growth, he said.
The discount segment overall performed poorly, showing a sector increase of just 2 percent against a tough comparison to last year when comps grew 4.3 percent.
Discounters suffered in October as they came up against comps driven higher by last year's hurricane season, said Deborah Weinswig, analyst at Citigroup, in a research note. Target turned in a 3.9 percent increase in same-store sales, and TJX Cos. beat expectations and climbed 5 percent.
Warehouse clubs didn't fare any better. Costco reported a 2 percent increase, compared with a 10 percent increase in October 2005, while BJ's Wholesale Club was up 1.7 percent versus a comparison of 2.9 percent.Although mixed results have been the hallmark of comps throughout 2006, nowhere is that trend more apparent than in the specialty sector. Guess turned in strong comps with an 11.8 percent increase after an 8.6 percent rise in September. However, Gap brand stores continued to slip, declining 4 percent after a 5 percent drop in September.
Cooler temperatures in September and October drove seasonal apparel sales, benefiting specialty chains with the right fashion mix and merchandise offerings. Analysts said the fashion offerings at American Eagle continued to bring customers in, driving an 8 percent same-store sales increase. The retailer set its early holiday collection in the fourth week of the month. According to company statements and analysts, consumers responded favorably, which helps create a positive outlook for the fourth quarter.
In addition to American Eagle, Abercrombie & Fitch, Ann Taylor, Nordstrom, and Bloomingdale's are all on trend for the holiday selling season, said Dana Telsey, president, Telsey Advisory Group. Trends for holiday include the color red, sweaters and a continued focus on leather goods and accessories, she said.
The up-and-down results across all segments will most likely continue into holiday, several analysts said. Overall, that should lead to a decent holiday season, they concluded.
"While it [the same-store sales rate] is uninspiring, retail sales continue to grow rapidly enough to weigh against the nearness of a hard landing,'' said John Lonski, chief economist with ratings agency Moody's Investors Service. "We are still seeing a rate of growth for personal income that should be rapid enough to support a decent, albeit unexciting, holiday season."
If personal income maintains its current pace and energy prices stay relatively low, the holiday season could even surprise on the upside, he added.
Regardless, retailers will have to continue to be razor sharp about their merchandise mix and how they reach consumers as the holiday season progresses. Meanwhile, fuel prices and weather trends are expected to have the greatest impact on holiday.
Weather trends this year are forecast to return to temperatures closer to seasonal averages, with warmer weather in the first half of the holiday season and colder temperatures in the second half, Paul Walsh, vice president of Planalytics Inc., a business weather intelligence service, said in a preview call the firm hosted in October. Last year there were record cold temperatures early in the season, followed by record warm temperatures, which shifted seasonal apparel purchases earlier.
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