Holiday 2009 could see profits victory snapped from the jaws of sales defeat.
This story first appeared in the September 23, 2009 issue of WWD. Subscribe Today.
The annual guessing game that surrounds the all-important holiday season has become a study of contradictions — with observers believing that even as the holiday sales performance could be one of the worst on record, retailers’ moves over the last nine months to slash inventories and control costs could mean their bottom lines actually improve in the fourth quarter.
A forecast from Retail Forward on Tuesday indicated a 2 percent drop in apparel and accessories sales for the fourth quarter, reflecting a continuation of the consumer retreat that pushed sales down more than 9 percent in the same period a year earlier.
Overall retail sales, excluding auto, food and drug sales, are projected to come in flat after falling 4.5 percent a year earlier, teeing up the upcoming fourth quarter as the second worst in 42 years.
The Retail Forward study adds to the steady knell of downbeat projections for holiday, with most projecting the season’s performance to range from flat to down in the single digits. And the consensus is that consumers — having been trained by last year’s steep discounts at retail — are going to wait until the last possible moment to see who blinks first.
Even with the poor sales outlook, Wall Street remains generally bullish on the sector. Retail stocks, which dipped modestly Tuesday, are up 37.8 percent so far this year, and Wall Street is trumpeting the industry’s gross margin potential in the wake of better inventory controls and price reductions from factories.
“You could end up with a fantastic earnings report card,” said Deborah Weinswig, broadlines analyst at Citi. “With inventories so low, even if you have negative [comparable-store sales] you could still have a very positive earnings number.”
Technological updates are helping chains get goods to their stores more quickly and some companies are considering shipping goods via air, Weinswig said. Air freight is a costly but effective way to get inventory where it needs to be, when it needs to be there.
“There are some real changes happening here,” she said.
Weinswig upgraded Macy’s Inc. to “buy” from “hold” Tuesday, based on the store’s My Macy’s initiative to bring more local relevance to its offerings, price cuts from suppliers and the company’s efforts to increase its speed-to-market. The analyst said falling product costs could boost the company’s gross margins by 50 basis points next year.
Shares of Macy’s rose 5.5 percent to $18.77 Tuesday even as the S&P Retail Index fell 0.2 percent, or 0.87 points, to 384.92, and the Dow Jones Industrial Average advanced 0.5 percent, or 51.01 points, to 9,829.87.
Given the time it takes to design, plan, produce and ship apparel — nine months in some cases — the changes retailers made following last year’s financial fallout are just beginning to show up in stores. It remains an open question if firms have cut back too much or too little on inventory, or even whether they’ve played it too safe from a fashion perspective.
For some, the dollars and cents could add up quite nicely even if shoppers are shy at the sales counter, as expected.
“Retailers have had the opportunity to proactively plan for the reduction of consumer demand and, in many cases, have been overconservative because of being caught the way they were for holiday ’08,” said Antony Karabus, chief executive officer of Karabus Management.
But the financial crisis and the severity of the recession could have succeeded in bringing scarcity back to fashion, Karabus said.
“If consumers want something, they’re going to have to pay much closer to full price than they would have a year ago because that glut of inventory will be gone,” he said. Increased full-price selling, along with trimmed corporate structures and cost bases, mean better gross margins.
“From a company’s health perspective and a stock perspective, there are other things to look at than just purely top-line growth, and one of them is gross margin improvement,” said Paul Lejuez, specialty store analyst at Credit Suisse. “It’s true that top-line trends are likely to be on the weaker side. The question is how much has better inventory management led these companies to better gross margins.”
And although consumer confidence has recovered some, shoppers are still jittery. The unemployment rate is at a 26-year high of 9.7 percent, and the signs of economic pain persist across all sectors — even as some data, such as home starts and the index of leading indicators, show an uptick.
A further indication of the pressure the retail sector is under came Tuesday when Taubman Centers Inc. said it would write down the value of two of its properties, The Pier Shops at Caesars in Atlantic City and Regency Square in Richmond, Va., reducing its earnings by $161 million to $169 million. The Taubman write-downs are the latest in a string in the retail and apparel sector ranging from Neiman Marcus to Liz Claiborne.
“We’ve invested a significant amount of time and capital in these two properties,” said Robert Taubman, chairman, president and ceo. “Unfortunately, the current economic environment has worked against our best efforts.”
The real estate firm said it would stop financial support of The Pier Shops and begin discussions with the property’s lender.