By  on August 13, 2014

Retailers managed to pick themselves up after a disastrous start to the year — but they’re still just limping into the second half.

Experts said the recently concluded second quarter started off with some promise as shoppers came out of their shells in May, shook off the colder weather and began refilling their wardrobes and working off some of their pent-up demand.

But the relief for merchants was short-lived and consumers grew cautious again, shifting spending from discretionary categories such as fashion in favor of new cars and other non-discretionary purchases. Apparel retailers let out the stops and cut prices to relieve heavy inventories, so much so that June and July started to seem like one long sale.

“Once you got through the first week of June and you hit the second week, that pent-up demand was spent and the quarter resumed its prior, long-term secular slowness, and that’s true almost across the board,” said Craig Johnson, president of Customer Growth Partners. “It’s true virtually throughout the mall and the department store side as well as the specialty apparel side.”

Just how hard those price promotions hit profits will begin to become clear as second-quarter numbers for the nation’s largest retailers start to roll in.

“Overall inventories we think are cleaner than they were at the end of [the first quarter], but they are still not fully clean and almost everybody is going to feel margin pressure,” said Johnson. “Most people will have significant margin pressure because of the heavy promotions.”

Although Macy’s Inc. starts the heaviest phase of retail earnings season today, the department store is expected to be more an outlier than standard bearer for the quarter. Analysts project that Macy’s Inc.’s earnings per share in the second three months of the fiscal year rose 19.4 percent to 86 cents on a 3.9 percent sales gain, to $6.3 billion.

After Macy’s, only offpricers The TJX Cos. Inc. and Ross Stores Inc. are projected to show double-digit profit gains in a WWD sample of 21 retailers set to report earnings over the next few weeks. TJX and Ross are also both believed to be among the top-five sales gainers for the quarter, pulling in combined revenues that approach $10 billion for the quarter and underscoring the importance of the sector.

On the opposite side of the spectrum, Sears Holdings Corp. and Aéropostale Inc. are projected to turn in wider losses for the quarter, while The Bon-Ton Stores Inc. and J.C. Penney Co. Inc. narrow their losses.

“You’re not seeing great spending throughout this year,” said Chuck Pinson-Rose, a debt analyst who covers Wal-Mart Stores Inc. and Target Corp. at Standard & Poor’s.

“Consumers are forgoing a lot of small-ticket items, including apparel, for other large-ticket items such as home-improvement projects or a car,” Pinson-Rose said. “We haven’t had a great economy and a great consumer spending environment for really six years or so and at this point consumers are really trained that, if they wait, they’ll probably get a discount.”

Wal-Mart and Target — which incidentally are both being led by new chief executive officers — are working hard to fend off Web giant Amazon.com and up their e-commerce games. But both businesses still get the vast majority of their sales from their brick-and-mortar operations.

“For them to really improve their trends, they’ve got to change the in-store dynamic,” Pinson-Rose said. “For Wal-Mart to change its trajectory, they’ve got to worry about Supercenter same-store sales.”

The same is true for most retailers, who find e-commerce is the fastest growing part of their business — and of endless fascination to investors — but still rely on their stores for the lion’s share of their businesses.

Meanwhile, merchants are trying to get a feel for consumer’s shifting fashion tastes.

“We are at the start of a major fashion shift with the silhouette moving from big over little to a flip of the inverted triangle,” said UBS analyst Roxanne Meyer, who sees second-half headwinds for specialty players. “Soft, flowy bottoms are replacing the skinny jean, driven by ath-leisure and Bohemian trends. Denim, a key staple for [the back-to-school season], is down-trending, as evidenced by [VF Corp.] and J Brand callouts and early b-t-s promos. As retailers and customers navigate this transitional period, we believe what is a lack of material newness in apparel could hamper the ability to reverse negative comp trends.”

As a result, there are several sectors that are struggling to find their place in the quickly shifting marketplace.

Last decade’s darling, the teen specialty sector, has been reeling. And a profit warning from Ann Inc. last week signaled continued weakness at missy retailers. Traffic in the mall has generally thinned as consumers use the Web to plot their shopping trips and make fewer stops.

J.P. Morgan analyst Brian Tunick said specialty stores are working to more strictly control inventories in the second half.

“If they succeed in aligning inventory flows with sales, we are [somewhat positive] that the sector could benefit from a more rational promotional cadence,” he said in a note to clients. “That said, excess inventory and a more aggressive promotional stance by one retailer can have broad implications across the group.”

Investors, though, are skeptical of the specialty retailers.

“More investors are taking the bearish view that inconsistent traffic trends, a lack of a ‘must have’ item (despite pockets of newness), share shifts to newer players such as fast-fashion retailers and a stepped-up game from department stores will contribute to negative estimate revisions despite easier compares,” Tunick said.

Even with the downbeat elements, there is some hope for retailers.

Antony Karabus, ceo of HRC Advisory, said there are “green shoots” or “signs of life” at companies that are taking a more-focused approach across their businesses.

“I’m seeing more of a divergence between the haves and the have-nots,” Karabus said, noting retail is migrating away from a one-size-fits-all attitude.

“Those that have simply gone in and cut costs are not better off,” he said. “We still have some people who do broad-brush promotions, broad-brush e-mails; they don’t have key-item strategies that are effective.”

Instead, he said, successful retailers are targeting their marketing, zeroing in on specific groups of customers, developing key-item programs for them and focusing their store bases. Call it laser-guided retail.

It’s an approach that fits in with the age of big data and Internet sales. And maybe a little more focus and a chance to get more out of what they have is what retailers need to get out of the doldrums.

That and a better economy.

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