Credit jitters collided with already anemic consumer demand and even a trio of hurricanes to send September same-store sales results to their low point for the year, reducing already sober holiday expectations even further.
Although Wal-Mart Stores Inc.’s U.S. stores eked out a 2.4 percent gain in comparable-store sales, just missing analysts’ predictions of a 2.5 percent pickup, retailers, particularly department stores, got clobbered by the effects of the global financial crisis and Hurricanes Gustav, Hanna and Ike, causing many to slash third-quarter guidance and a few to even question if their already miserly management of inventories has been sharp enough to minimize their exposure heading into the holiday season.
Upscale Neiman Marcus Inc. posted a 15.8 percent drop in comps, the biggest decline reported by any apparel retailer on Wednesday, and was the first to sound an alarm about inventories.
“Based on our September performance and the current economic environment, we expect customer demand will remain weak for an extended period of time,” said Burt Tansky, chairman and chief executive officer. “As a result, we currently anticipate that our fall season gross margin will decline on a year-over-year basis and that inventory levels will be higher than planned. Our entire team is focused on stimulating sales, lowering inventory levels, reducing expenses and evaluating all capital projects.”
Citigroup broadlines retail analyst Deborah Weinswig added Neiman’s publicly held rivals Saks Inc. and Nordstrom Inc., which both lowered their third-quarter guidance, “definitely did not cut enough inventory” either.
Unlike Saks, Nordstrom decided against launching promotions for fear that when the economic slowdown ends, its customers would be “addicted” to the sales, “kind of like a drug,” Weinswig said.
Saks had a 10.9 percent comp decline while Nordstrom saw a 9.6 percent drop.
Although most retailers moved up their September reporting day to Wednesday because of the observance of the Yom Kippur holiday, a handful — including Gap Inc., Abercrombie & Fitch Co. and Chico’s FAS Inc. — will release their September results today.
Retail shares seesawed up and down Wednesday, but ended off 0.9 percent, as the Standard & Poor’s Retail Index slid 2.82 points to 300.77.
Despite the poor sales showing, retailers outperformed the broader market writ large. The Dow Jones Industrial Average fell 2 percent, or 189.01 points, to 9,258.10, shedding nearly 350 points in the final half hour of trading after spending most of the afternoon in positive territory.
The final numbers put the Dow 19.6 percent lower than its 11,510.74 finish exactly one month earlier.
As for comps, while department and specialty stores struggled, discount retailers held their own. The movement towards value-driven shopping has become a remedy for ailing consumers, Customer Growth Partners LLC president Craig Johnson said.
“What had been a rotation to value retailers has become a full-fledged flight to value, and that’s why we are seeing such relatively strong results from the Wal-Marts, Costcos and BJ’s of the world,” he said.
As a result, department stores and mall-based retailers are taking the biggest hits in this economy, as more consumers opt for one-stop shopping, he said.
In addition to Wal-Mart’s 2.4 percent pickup, BJ’s Wholesale Club Inc. was up 10.4 percent for the month, excluding fuel, and Costco Wholesale Corp. up 7 percent.
Mall traffic fell off significantly in September, according to research firm ShopperTrak. The number of customer visits to stores dropped 9.2 percent in September, compared with the 3 to 5 percent average declines seen so far this year, ShopperTrak said.
On average, comps for department stores tracked by WWD fell 10.1 percent, versus a modest 0.7 percent dip last September. Specialty stores were down 3 percent and mass merchants up 0.4 percent. However, Target Corp. and Stein Mart Inc. posted declines of 3 and 14.8 percent, respectively.
Like Neiman’s, J.C. Penney Co. Inc. and Dillard’s Inc. reported double-digit comp declines Wednesday, with drops of 12.4 and 12 percent, respectively. With the anticipated “continuation of weaker sales trends,” Penney’s lowered earnings guidance for the third quarter to 50 to 60 cents a share from a range of 70 to 75 cents. The department store also said October comps are expected to decrease by low-double digits.
“During the September period, further weakening of the economic climate was accompanied by unprecedented events in the financial markets,” said Myron E. “Mike” Ullman 3rd, chairman and ceo. “As a result, our business was impacted by falling consumer confidence and spending levels, and mall traffic experienced an even greater decline than in previous months.”
Kohl’s Corp.’s decline of 5.5 percent was better than expected, and The Bon-Ton Stores Inc. was down slightly less, 4.6 percent.
Specialty retailers didn’t fare any better than department stores. Maintaining third-quarter guidance, The Wet Seal Inc. dropped 7.5 percent as the flagship brand sagged 3.1 percent versus a 21.7 percent plunge at Arden B. Brean Murray, Carret & Co. retail analyst Eric Beder said, “There are more than enough further catalysts in 2009 for investors to remain confident in Wet Seal,” pinpointing the company’s cost-cutting initiatives.
Missy retailer Caché Inc. reported a 6 percent decline in comps, while maternity retailer Mothers Work Inc. saw a 1.3 percent dip.
Children’s Place Retail Stores Inc. posted flat comps, versus a 3 percent drop in 2007.
Teen retailer American Eagle Outfitters Inc. reported a 6 percent decrease in comps, despite the fact that men’s apparel comped upward in the high-single digits. The women’s fashion selection was “not appealing to the target customer,” said Citigroup retail analyst Kimberly Greenberger of the mid-teen decline in women’s apparel comps.
Greenberger said she doesn’t expect the trends for the women’s business to change in time for the holiday season.
Rival Aéropostale Inc. was the day’s specialty comp leader, reporting a 5 percent jump versus a 1.3 percent gain in comps last September. Pacific Sunwear of California Inc.’s 5 percent decrease in same-store sales came despite a 21 percent drop in comps in its California, Florida and Desert Southwest stores and 18 percent drop in the region including the Rocky Mountains, Great Plains and Pacific Northwest. As a result, the teen retailer said it now estimates that its third-quarter earnings will be at the low end of its previously announced range of breakeven to 5 cents a diluted share.
While both retailers were in line with expectations, Greenberger said inventories were higher than those of other specialty retailers.
In general, inventory in the softlines sector was down a “phenomenal” 9 percent, but PacSun and Aéropostale are a little bit more “concerning,” Greenberger said.
“Aéropostale had inventory per square foot up 9 percent. That won’t prove to be a problem for them if they can continue to deliver double-digit same-store sales increases, but it looks like, based on the deceleration we are seeing across the board in September, that it is not likely,” she said. “That inventory position could come back to bite Aéropostale throughout the quarter and could lead to higher markdowns.
Inventory for PacSun was up 2.6 percent. In order for the company to clear inventory, the retailer had to increase markdowns, causing it to lower guidance, she said.
“In many ways, specialty retailers have the same fate as department stores,” said Alix Partners managing director Matt Katz, who added consumers continue to trade discretionary items for consumable items. One-stop shopping is just one of the reasons why shoppers prefer discounters, he said, noting that, while Target’s apparel focus may help it improve sales during the holidays, the overall season “won’t be pleasant” for any retailers.
“From a financial perspective, it seems as though we are getting closer to the bottom,” he said, referencing the recent financial crisis. “But it is unclear what the consumer will do if the credit market hardens. Retailers will take a hit.”
Katz said he thinks consumers will continue to feel the pain into the first and second quarters of next year. “We are preparing our clients for the tsunami of ’09,” he said.
Others still have a slightly more optimistic view.
“The consumer is still out there,” said Citigroup’s Weinswig. “She might be on life support, but she’s there.”
On Wall Street, Saks led department store stocks down, falling 13.3 percent to $6.24. Other decliners included J.C. Penney, down 4.6 percent to $27.25; Sears Holdings Corp., 3.3 percent to $76.23, and Macy’s Inc., 2.5 percent to $13.36.
In the discount realm, Wal-Mart’s shares slid 0.5 percent to $54.55, as Target managed a 3.6 percent rise to $41.30. Stein Mart dropped 14 percent to $2.53.
Specialty stores taking the biggest hit were American Eagle, down 9.9 percent to $11.27; Hot Topic Inc., 8.4 percent to $4.92; Pacific Sunwear, 7 percent to $4.77, and Caché, 6.7 percent to $4.59. Vendors losing ground included: True Religion Apparel Inc., down 9.7 percent to $19.73; Polo Ralph Lauren Corp., 5.1 percent to $51.40; Nike Inc., 3.9 percent to $55.70, and Fossil Inc., 3.5 percent to $22.88.
The start of trading on Wednesday followed the announcement of coordinated interest rate reductions in the U.S. and Europe. That came too late to help stocks in Asia, however. In Tokyo, the Nikkei 225 withered 9.4 percent, or 952.58 points, to 9,203.32 — the steepest percentage drop in over 20 years. Among those registering steep declines were Link Theory Holdings Co. Ltd., down 14 percent; Shiseido Co. Ltd., 12.3 percent; Onward Holdings Co. Ltd., 9.9 percent, and Fast Retailing Co. Ltd., 8.8 percent. Elsewhere in Asia, traders in Hong Kong pushed the Hang Seng Index down 8.2 percent, or 1,372.03 points, to 15,421.73.
European stock markets also slid dramatically, but not quite as severely as their Asian counterparts. In London, the FTSE 100 fell 5.2 percent, or 238.53 points, to 4,366.69. Decliners included Asos plc, down 12.7 percent; French Connection Group plc, 6.5 percent, and Marks and Spencer Group plc, 3.9 percent. Investors in Paris pushed the CAC 40 down 6.3 percent, or 235.33 points, to 3,496.89. In Milan, IT Holding SpA fell 28.1 percent and Safilo Group SpA lost 10.8 percent. In Frankfurt, Escada lost 12.1 percent.
Even in the absence of a rally, economists were encouraged by the coordinated rate cuts in the U.S. and Europe.
“The move to coordinated action by the major central banks represents a new phase in the global financial crisis,” said Brian Bethune, chief U.S. financial economist at Global Insight. “While overdue, these moves are much more effective than unilateral action in terms of defusing the contagion and negative feedback loops that have been spinning back and forth from one major market to another.”
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