In a challenging holiday season, appealing merchandise at an attractive price point is the key to salvaging gross margins.
More than any other factor, financial experts said holiday results this year will come down to product. Industry experts differ in their expectations for fourth-quarter margins because of a season marked by macroeconomics that squeezed consumers, as well as stormy weather that disrupted shopping across large swaths of the U.S. Some predicted that final numbers will defy expectations, while others caution that being promotional too early in the season will adversely affect fourth-quarter margins.
There is consensus, however, that the quarter is likely to shape up to be a retailer-by-retailer story.
"No one has the perfect crystal ball,'' said Craig Johnson, president of Customer Growth Partners. "You never know what's hot from one week to the next. If you have a nimble supply chain, you can get it right."
There are headwinds for consumers this year that could be a factor for some — although not all — retailers, analysts said. Economic pressures have made holiday shopping even more competitive.
"In this type of environment, it is more important for the retailer to have something new and exciting and interesting," said Howard Tubin, director of equity research at RBC Capital Markets. "If you don't give them a reason to shop, they won't shop."
"The customer has to want what you're offering,'' said Richard Jaffe, analyst at Stifel Nicolaus & Co. Inc. "There are issues about attractiveness of product, competitiveness in the marketplace and the willingness of the consumer to spend.''
If consumers are not excited by what is in a store, little else matters.
"If you have the right product, margins should be fine," said Christine Chen, analyst and vice president equity research at Needham & Co. "The big unknown is how promotional the environment will get and the percentage of planned promotions versus unplanned promotions."
The fallout from high gas prices, the housing slowdown and tight credit makes consumers more attuned to the lure of discounted product.
"Shoppers are more keenly aware of discounts this year than in past years,'' said Stanley Officina, president of Ultimate Financial Solutions. "We don't expect substantial gross margins at retail."
It doesn't matter how good an inventory position is, he said. Whatever price is paid for an item if it has to be marked down, it affects margins.
Not all retailers are expecting a poor showing for the quarter. Customer Growth Partners' Johnson said he expects retail margins in all sectors to be better than anticipated based on strong top-line sales growth. In the apparel sphere, however, results could be more mixed, he said. Individual store performances are varied, with some in the ditch and some showing signs of a comeback. In general, mainline women's apparel is not doing well, but youth stores are, he said.
In the specialty sector, American Eagle Outfitters and J. Crew could post improving gross margins because they have had the right product and have tightly controlled inventory, some analysts said. Aéropostale also could do very well in the fourth quarter, sources said.
"Aéropostale is in, and as the kids would say, 'American Eagle is so over,'" said Johnson. The margins of well-run companies will follow the top line, he said.
Broad-line retailers could face pressures as well, with tough comparisons year-over-year.
"A lot of retailers planned their inventories more conservatively. There is more of a gross margin risk this year versus last year, with slow top-line growth and the promotional environment. A lot more business is being done around promotion events. More customers are also buying closer to need, so we have no idea how promotional stores are going to get. But no one is overreacting yet, there are still no aggressive unplanned markdowns," said Deborah Weinswig, analyst at Citigroup, of the broad-lines sector.
Saks, Kohl's, J.C. Penney and Nordstrom all are expected to report negative margins partly due to tough comparisons year-over-year, Weinswig said. Macy's is expected to be flat. For some retailers the fourth quarter will not be a good one for gross margins, which could have an impact since it is usually considered a good period, she said.
On the supply side, manufacturers and suppliers are also not immune to margin pressures.
"Most wholesale companies, if they were prudent, should have started to cut back or source more selectively coming into the fourth quarter. What has happened is that retailers in select cases have deferred and canceled certain orders," said Michael Stanley, managing director, Rosenthal & Rosenthal. There were earlier indications that things were softer in the first two quarters of the year, he said. Excess inventory at this stage could be more problematic than last year because the retail sources to dispose of that inventory have narrowed, Stanley said. For wholesalers, holding excess inventory could prove to be very problematic.
There is also the issue of markdowns, sources said. One financial source pointed out that, historically, certain retailers have used markdown allowances to fix their gross margins. "Retailers try to survive any way they can and it comes home to roost with importer or manufacturer, and they pass it on to their suppliers. It moves down the food chain. When things are tight, it affects everyone," said one financial executive.
No matter what happens during the holiday season, the long-range impact of the period could be felt long after the fourth quarter closes.
"People save up for the holidays. The question is, what will happen to spending in 2008? Fourth-quarter expectations are so low," said Chen.
London’s newly opened @designmuseum will look back on the life and work of Azzedine Alaïa in a show that the designer helped to curate before he died of heart failure last month. The retrospective, which Alaïa had worked on with Mark Wilson, chief curator of the @groningermuseum, will look at the impact of his work worldwide. The show, “Azzedine Alaïa: The Couturier,” will run from May 10 to October 7. Read more about the exhibit on WWD.com #wwdnews #wwdfashion (📷: @zefashioninsider)
@Pharrell and his wife Helen Lasichanh were among the stars that came out to celebrate @rimowa’s first pop-up concept shop. The space, which is located on Rodeo Drive in Beverly Hills, draws inspiration from airport luggage carousels and lounge areas – and features the company’s luggage and accessories. If the pop-up is successful it could pave the way for addition temporary shops throughout the world. #wwdfashion (📷: Owen Kolasinski/BFA)
@carineroitfeld celebrated @crfashionbook’s first calendar last night with a dinner party at Spring Place in Manhattan. Photographed by @stevenkleinstudio, the calendar takes on a fitness theme and features @joansmalls, @gigihadid, @danielle_herrington_ – pictured here – and more. “[Carine Roitfeld] wanted me to feel sexy and she wanted me to be myself and feel it out on my own and do what I felt was right,” said Herrington, aka Miss October. #wwdeye
@saintrecords and @virgilabloh last night at @americanexpress’ “A Night With Success Makers” event. “I always bring it back to community because without that I wouldn’t have the courage,” said Knowles when asked how she has gotten where she is now. Read more highlights from their conversation on WWD.com. #wwdeye (📷: @lizdoupnik)
This Just In: Industry sources have told WWD that Anastasia Soare is rumored to be considering selling her beauty business, @anastasiabeverlyhills. According to those sources, Soare has tapped investment bank Imperial Capital to explore sale options for her eponymous beauty brand –– and with at least $340 million in net sales, this would be a big deal. Put in context of other recent transactions for makeup companies, Soare’s price tag could be in the billions if she were to sell the whole thing. #wwdnews #wwdbeauty (📷: @clint_spaulding)
@assouline’s latest book, “The Spirit of Bentley: Be Extraordinary” captures the adventurous attitudes and opulent lifestyles of @bentleymotors’ most creative owners and enthusiasts throughout the U.K. The 292-page hardcover has a section dedicated to showing its team of skilled artisans and photos of its most colorful owners, from George Bamford to designer @alicetemperley, pictured here by Aline Coquelle. #wwdeye
@google released its report on the most popular search terms this year. For fashion brands, the list was led by @gucci, the luxury brand that stunned the market last October when it pledged to stop using fur. Runner ups were @supremenewyork and @fashionnova, along with more established brands like @louisvuitton, @chanelofficial and @ysl. #wwdfashion (📷: @aitorrosasphoto)
In yet another fashion show shuffle, @elleryland is moving its show in sync with the Paris couture calendar — though the brand is still keeping one foot on the city’s ready-to-wear schedule. Their runway show in January will coincide with the launch of a new strategy: designing two main collections each year instead of four, which will then be released in four drops. “As we all know, the system needs to change. We need to show sooner to give time back to artisans and designers to do what they do best — create,” said founder Kym Ellery. #wwdnews #wwdfashion (📷: @kukukuba)
@maxmara’s classic 101801 coat was the cornerstone of its pre-fall 2018 collection. The design team expanded the traditional double-breasted, kimono-sleeved style into a trapeze coat, lean belted styles and a peacoat and presented them in monochromatic looks – like the camel one pictured here. #wwdfashion #prefall18 (📷: George Chinsee)