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Most retailers probably are happy to have July, and, in fact, their second quarters, behind them.
This story first appeared in the August 7, 2009 issue of WWD. Subscribe Today.
The anxiety-building trend of steep comparable-store sales declines continued for most chains last month and made for a weak ending for most retailers’ second quarters. But the drops were no worse than in June and investors are still looking ahead to the holiday season, betting stores can improve on last year’s dismal performances — if for no other reason than the comparisons will become easier.
Before Christmas, though, retailers will have to get through the back-to-school season, which depends heavily on the next several weeks given the tepid showing in July and the later timing of Labor Day, Sept. 7, compared with last year.
Stores are expected to cut some of their prices to draw customers, but it remains to be seen if retailers will turn to more drastic promotions to clear inventory as they head into the all-important holiday period and the fourth quarter.
“The next two or three weeks are going to be really crucial,” said Eric Beder, an analyst at Brean Murray Carret & Co. “If we don’t see a turn beyond what we saw in July, in early August you could see discounting become more aggressive.”
And it isn’t only the firms focusing on the school-bound set who are up against the wall.
Luxury retailers were again among the hardest hit in July, with Neiman Marcus Inc. comping down 25.5 percent and Saks Inc., 16.3 percent, while Nordstrom Inc. slid 6.9 percent.
Total July net sales for the three luxe firms fell $131 million from a year earlier. This shortfall means the companies have much less money coming in and have had to cut expenses to keep up with overhead.
According to Goldman Sachs’ composite index, overall department store comps fell 9.8 percent last month, as specialty and off-price stores dipped 3.5 percent and discount stores dropped 6.9 percent. Wal-Mart Stores Inc. no longer reports monthly results, but Target Corp. said its same-store sales fell 6.5 percent for the month.
Despite the weak comps scorecard for July, the S&P Retail Index rose 1.1 percent, or 4 points, on Thursday to 359.72 as the Dow Jones Industrial Average sank 0.3 percent, or 24.71 points, to 9,256.26. Analysts said investors are focused squarely on the fourth quarter, when they hope retail results will turn from negative to positive as comparisons ease.
“There are a number of things that held back July, and yet the numbers stayed about the same,” said Frank Badillo, senior economist at Retail Forward Inc.
The July comparison is skewed by fewer tax holidays this year; the later start to the back-to-school season, tied to the timing of Labor Day; leaner inventories, and the absence of last year’s government stimulus checks.
Badillo said the Cash for Clunkers program to spur sales of fuel-efficient cars was cutting into discretionary spending on other items.
“Until shoppers loosen their wallets overall, we aren’t going to see all the boats rise in the tide,” he said. “Some will continue to sink, while others stay afloat. Shoppers remain very focused on cutting back and looking for the best deal.”
At least teen retailers appear to have a few trends to hang their b-t-s businesses on.
“This season there seems to be a uniform emerging,” said Christine Chen, equity analyst at Needham & Co. LLC, pointing to plaid shirts, boyfriend-style jeans and blazers.
Even accounting for the inherent resilience of teen shoppers, there are plenty of challenges facing the sector.
Abercrombie & Fitch Co. has tried to maintain its brand image and hold prices, but posted a 28 percent comp drop in July. But Chen said A&F’s strategy would pay off over the long run. “When we finally come out of this, they’ll be one of the few brands out there that won’t have a hard time getting the customer to pay full price again, as long as they have the product right,” she said.
For now, making do with less should be the order of the day. Retailers are continuing to focus on tighter inventory control and lower expenses and are setting the profit bar low enough to avoid any unsettling surprises for Wall Street.
Macy’s Inc., J.C. Penney Co. Inc. and Gap Inc. all said Thursday second-quarter results would be better than anticipated despite comp declines for the month. Macy’s said second-quarter profits, excluding restructuring costs, would range from 15 cents to 17 cents a share, ahead of the 5 cents Wall Street was expecting. Penney’s said a smaller-than-planned sales decline and improved gross margins would lead it to second-quarter losses of about 1 cent a share, better than the 8 cent deficit Wall Street expected. And Gap said quarterly profits would be 30 cents to 32 cents a share, compared with the 28 cents analysts were projecting.
Kohl’s Corp. managed a 0.4 percent comp rise — the only department store to exceed year-ago comp sales — and said it would beat second-quarter profit projections.
“The margins are holding up better because inventory positions are cleaner,” said Monica Aggarwal, a debt analyst who covers broadline retailers at Fitch Ratings.
Retailers are selling on more of a regular promotion cycle, rather than marking down goods to clear inventory as they had to last fall and winter, she said.
Some are also picking up business from their fallen retail brethren, such as Mervyns, which went into bankruptcy last year and was liquidated in the fall.
Kohl’s, for one, had a double-digit comp gain last month in the Southwest, Mervyns’ principal market. The retailer now expects second-quarter profits of 73 cents to 74 cents a diluted share, ahead of the 67 cents anticipated by analysts.
The strength at Kohl’s, which competes on price as a promotional department store, is indicative of the consumer’s general drive to try to get the most for their money. Further evidence of this, if any were needed, is that comps at off-price giant The TJX Cos. Inc. rose 4 percent on what was described as a significant increase in traffic.
“There are very few retailers that can say that they have traffic trends that are that strong,” said Paul Lejuez, analyst at Credit Suisse. “In most cases, traffic is down and sometimes down significantly.”
Lejuez said customers are shifting away from department and specialty stores and toward the off-pricers, especially given the $11.2 trillion reduction in consumer net worth last year with declines in real estate values, pension funds and stock holdings.
Consumers might have reset to a new reality, one that’s going to dictate the future of retailing.
“I don’t think that we’re going to come screaming back to higher levels when we anniversary some of the initial declines in the back half of the year,” Lejuez said. “We really have kind of rebased where sales productivity levels will be going forward.”
Shoppers have gone into a protective crouch during the recession, pushing the savings rate up significantly. Personal savings totaled 4.6 percent of disposable income in June, down from 6.2 percent in May, but well ahead of the 2.7 percent savings rate last year.
“We’re going to see a sustained increase in the savings rate [and] there’s still a lot of anxiety out there about job security,” said Michael Dart, the senior partner heading up Kurt Salmon Associates’ private equity and strategy practice. “When we look at the consumer’s mind-set, what we’re seeing is the consumers themselves are expecting to buy more on sale. The consumer’s got a really keen focus on intense value.