By  on January 6, 2012

Call it the holiday squeeze.

That sums up the sense of December, when retailers pumped up sales but at the cost of margins. While most stores reported positive comps for the month, the impact on profits won’t be known until fourth-quarter results are reported in February.

On Thursday, retailers posted monthly sales results, indicating about a 3.5 percent gain on average. That’s fair, but the profit picture has yet to emerge. “January is critical. Retailers are waiting to see gift card redemptions and the return rate. For most retailers, the door is not yet closed on holiday,” said Alison Paul, vice chairman and U.S. retail and distribution leader of Deloitte LLP.

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There is just too much apparel inventory out there and too many apparel players,” complained one retail chief executive officer. “The so-called regular-priced retailers all discounted beyond anything they did before. They were buying sales for no profit.”

“I don’t think there’s too much apparel out there,” added a top department store official with a different take. “It’s just that consumers are getting really choosy.”

Macy’s Inc., often seen as a barometer of the industry, was more of an exception, reporting a 6.2 percent same-store sales increase for December. “It felt particularly good to see how we stood out,” said Terry Lundgren, chairman and ceo, who cited women’s shoes, handbags, cosmetics, fine and fashion watches, home textiles, housewares, luggage and men’s wear as leading categories.

Though Macy’s was very promotional through the holiday season, executives aren’t fretting margins. The company raised its fourth-quarter guidance to $1.55 to $1.60 a share, from a previous $1.52 to $1.57. The forecast for fourth-quarter same-store sales was also lifted, to 5.3 to 5.5 percent, from 4 to 4.5 percent.

Lundgren did acknowledge some excess merchandise in cold-weather departments though he’s confident it’s just a matter of time before it sells. “Our view is it’s going to get cold. We will just sell it in January, February and March,” instead of November and December, Lundgren said. Asked if selling the coats and gloves later means delaying some spring deliveries, Lundgren replied, “We won’t bring in as much spring in the cold weather.”

Ross Stores Inc. also cited cold-weather merchandise, as well as moderate-price fashion, as weak categories, but otherwise had a solid month, reporting a 9 percent comp gain. Juniors and shoes led the business. “We are very pleased with our much-stronger-than-expected sales gains in December,” said Michael Balmuth, vice chairman and ceo. The off-pricer also raised its fourth-quarter earnings projection to 82 to 83 cents a share, from 77 to 80 cents.

Among the other strong performers during December were Nordstrom Inc., Saks Inc., The TJX Cos. Inc., Apple Inc., Costco Wholesale Corp., Dillard’s Inc. and Limited Brands Inc., particularly Victoria’s Secret. Wal-Mart Stores Inc. was also said to be good but does not report monthly sales. Retailers were lifted by a late surge in traffic beginning Saturday, Dec. 17, a favorable calendar providing an extra day to shop compared with last year, a strong Black Friday and robust online sales through much of the season. Across the nation, the best-selling fashion categories were accessories, cosmetics, contemporary sportswear, notably colored jeans, and men’s wear.

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Among the retail disappointments were Gap Inc., Target Corp., J.C. Penney Co. Inc., Sears Holdings Corp., Kohl’s Corp., The Talbots Inc., Chico’s FAS Inc., Abercrombie & Fitch Co. and Aéropostale Inc.

“We expected December to be highly promotional, and while we competed aggressively across our brands, our performance was below our expectations,” said Glenn Murphy, chairman and ceo of Gap Inc., which posted a 4 percent drop in comparable-store sales. “That said, we are encouraged by bright spots across our business, and we’re clear and focused on what needs to be fixed in order to improve our sales trend in 2012.”

At Stage Stores Inc., “While our December average unit retail was up 2.3 percent, it was not enough to offset cost inflation, and therefore will pressure our fourth-quarter gross margin rate,” said Andy Hall, president and ceo.

Margins industrywide may not be that bad, at least according to Arnold Aronson, managing director of retail strategies at Kurt Salmon. He sees “no big margin increases, in line with plans and budgets.”

Right now, the biggest concern of retailers is “cleaning out remnants of fall and winter and converting selling floors to spring,” Aronson said. “There is some excess, but most major retailers are in control.”

This month, “gift card redemption is the wild card and could be on the positive side, but we can probably expect some consumer fatigue having tapped out most of their spending power from Black Friday till end of December,” observed Aronson. “But in the total scheme of things, January is a relatively small month.”

“This is a sobering moment. The consumer is experiencing a little bit of a credit card hangover,” said Deloitte’s Paul. In light of the consumer mind-set and some excessive inventories, “Retailers will probably slow the spring delivery orders or put some on hold.”

Retail analyst Walter Loeb also said he heard of retailers telling vendors not to ship some spring goods. “While retail sales were satisfactory for the November-to-December period, approaching 4 percent, retailers took a hit in certain categories like ski jackets, coats, winter boots and sweaters, and took markdowns above their expectations, reducing profitability,” said Loeb. “Electronics did well but it’s a low-margin category and the business came at the expense of higher-margin categories.”

On the more positive side, Loeb said most promotions during Christmas were preplanned with profits baked into the sale prices, and manufacturers helped retailers develop merchandise with value and were more flexible in their production schedules to keep merchandise costs down. Retailers and manufacturers, Loeb said, “anticipated a tough season.”

“This Christmas there were record online sales. Now we are seeing record returns in that domain,” which will impact profits, said Nancy Puccinelli, associate fellow at Saïd Business School of the University of Oxford in the U.K. “The December numbers aren’t going to [fully] reflect returns.”

She also expressed concerns about the level of promotional activity: “It’s hard to imagine retailers doing all the discounting we have seen and still making a significant profit.” But promotions could still be ramped up. “It seems like retailers have been trying to hold off doing unilateral promotions across the store to move inventory,” she said. “My sense is it is going to have to happen.”

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