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Sharp cuts in inventories took some of the sting out of stores’ dismal January performances, which followed the toughest retailing year in more than a generation.
This story first appeared in the February 6, 2009 issue of WWD. Subscribe Today.
Comparable-store sales results for the month posted Thursday showed that, as consumer spending continued at historically weak levels, stocks were being tightly managed, sometimes even at the expense of sales. Several stores noted that top-line performance was hurt by a lack of clearance merchandise after extensive promotions leading up to Christmas.
If there was a silver lining to the month, it was that expectations finally managed to fall into synchronization with reality. Most stores commenting on fourth-quarter earnings prospects either reaffirmed previous guidance or raised it to slightly above previously revised cautious levels.
And, in a reflection of the attrition sweeping through retailing, Gottschalks Inc., itself a recent victim of bankruptcy, reported that its 13.3 percent advance was at least partly attributable to the disappearance of competitors like the liquidated Mervyns.
“We believe the closure of other retailers in many of our core California markets benefited our top-line performance,” said Jim Famalette, chairman and chief executive officer. “Our stores in these locations realized sales gains greater than 15 percent for the month.”
Investors weren’t troubled by the generally double-digit downward path traveled by stores in the fourth quarter’s final month, sending the Standard & Poor’s Retail Index up 8.51 points, or 3.3 percent, to 269.99. The Dow Jones Industrial Average, the S&P 500 and Nasdaq Composite rose 1.3, 1.6 and 2.1 percent, respectively. The better-than-expected tone of retail reports also helped the stocks of a number of department store suppliers, including Liz Claiborne Inc., which was up 20.4 percent, and Jones Apparel Group Inc., up 12.9 percent.
In a return to winning form after a disappointing December, Wal-Mart Stores Inc. generated an increase that surpassed analysts’ expectations. Comparable-store sales in the discounter’s U.S. stores were up 2.1 percent, about a percentage point higher than expected. However, the world’s largest retailer said that, going forward, it would not provide monthly sales forecasts.
“For Wal-Mart, the low-income shoppers that withdrew in December came back in January,” said TNS Retail Forward senior economist Frank Badillo. Wal-Mart’s comps rose 1.7 percent in December, its poorest showing of the quarter.
Although sales remain down overall, Badillo said shoppers are “giving signs that they do not necessarily intend to cut still deeper into their retail spending.”
But others were less optimistic.
“In the [fourth] quarter’s smallest, nonmaterial month, January merely represents the icing on a cake that had already been baked in December,” said Lazard Capital Markets LLC retail analyst Todd Slater, who noted that consumers are “filling bank accounts, not closets.”
Necessity and value won again, Slater noted, as mass merchants fared better than other retailers.
In the value channel, BJ’s Wholesale Club Inc. led the way with a 7.6 percent increase. On a constant currency basis, off-pricer The TJX Cos. Inc. had a 4 percent drop in comps when measured in constant currencies and a 9 percent decline including the negative impact of currency fluctuation. Rival Stein Mart Inc. trailed the sector pack once again with a 16.7 percent decrease.
Target Corp.’s comps fell 3.3 percent, while both Costco Wholesale Corp. and Ross Stores Inc. recorded a decline of 2 percent. Costco chief financial officer Richard Galanti said economic conditions “negatively affected” the company’s sales, especially in areas other than food. “Our margins have also been impacted by aggressive merchandise pricing in our core merchandise business to drive sales and increase market share, particularly during the first four weeks of the fiscal quarter,” he said.
Already battling anemic demand, numerous stores mentioned that January sales were also hampered by a shortage of inventory for clearance, a by-product of their plans for lean stock positions and the intensely promotional posture throughout the holiday season.
Retailers must strike a delicate balance in terms of their inventory position, said Chris Donnelly, a partner at Accenture’s retail practice. “The consequences of being underinventoried are far better than being overinventoried,” he said, noting that the retail market will remain promotional for some time.
In order to limit damage to their merchandising margins, Donnelly said retailers could reduce sourcing costs or use the “mark up to mark down” strategy.
“Consumers are well conditioned now that they should not be paying full price,” he said. “They know retailers are hurting. They can smell blood.”
Donnelly added that even consumers with money are not spending because it’s “not trendy; it’s kind of gauche.”
In an effort to drive sales, some upscale department stores are “willing to deal,” or sell merchandise at prices lower than advertised, he said, allowing them to conceal sale prices from their vendors in the process.
“They kind of live by the trends, and somewhat die by the trends,” he said.
High-end stores Neiman Marcus Inc., Saks Inc. and Nordstrom Inc. posted declines of 25.8, 23.7 and 11.4 percent, respectively.
Macy’s Inc. saw comps fall 4.4 percent, but positive trends in its business, including a surge in e-commerce activity, prompted the retailer to raise its fourth-quarter earnings guidance to a range of $1 to $1.02 a diluted share, excluding onetime items related to its recent restructuring initiative.
J.C. Penney Co. said its comps for the month were off 16.4 percent and narrowed its guidance to a range of 90 cents to 93 cents a share, at the lower end of its previous forecast of between 90 cents and $1.05 a share. Kohl’s Corp. had a 13.4 percent decline, but noted it expected its fourth-quarter earnings to exceed the First Call consensus estimate of 99 cents a diluted share.
Dillard’s Inc., The Bon-Ton Stores Inc. and Stage Stores Inc., fell 12, 8.2 and 13.1 percent, respectively.
Standard & Poor’s late Thursday put its debt ratings for Dillard’s Inc., Macy’s Inc., Neiman Marcus Group Inc., Nordstrom Inc., J.C. Penney Co. and Sears Holdings Corp. on credit watch with negative implications. In addition, the rating outlooks for The Bon-Ton Stores Inc., Kohl’s Corp. and Saks Inc. were switched to “negative” from “stable.”
Specialty retailers performed slightly better than department stores, with teen retailer The Buckle Inc. leading the group once again with a 14.7 percent comp increase. Value-focused Aéropostale Inc. was not far behind with an 11 percent rise, and pop culture-inspired Hot Topic Inc. reported a 6 percent increase. Buoyed by its Twilight license, Hot Topic’s namesake division recorded an 8.8 percent rise, and a 6.2 percent dip in comps registered by sister concept, Torrid.
Destination Maternity Corp. rose 5.1 percent, and increased about 1.1 percent after adjusting for a calendar shift. American Apparel Inc. posted a 2 percent gain.
Pacific Sunwear of California reiterated previously issued fourth-quarter earnings guidance as it reported a comp decline of 11 percent. The surf-inspired specialty store operator also said it will discontinue its participation in the monthly same-store sales reporting ritual.
The decision is likely to “alienate investors” at a time when they are looking for “more information,” said MKM Partners LLC retail analyst Linda Tsai.
Tsai said that PacSun has been having “trouble” with inventory management, in addition to its men’s business and its pullback from the footwear business, which left an opening for Zumiez Inc. to grab market share. Zumiez, which reported a 14.8 percent comp drop for the month, upped its fourth-quarter earnings outlook to be in the high range of its previously announced guidance of 52 cents to 57 cents a share.
Keeping to its brand-protection strategy, which entails limited promotions, Abercrombie & Fitch Co. reported a 20 percent decline in comps, while competitor American Eagle Outfitters Inc. posted a 22 percent decrease.
“Abercrombie has to lower their prices for people to get interested,” Tsai said. “I would think they need to switch their strategy soon.”
But Susquehanna retail analyst Tom Filandro said the teen retailer will stick to its plan, although it could hurt the company as rivals continue to mark down merchandise. He pointed to American Eagle Outfitters Inc., which recently put its jeans on sale for less than $30.
“This proactive approach is needed for American Eagle to get back to its roots,” he said. “If this [sale] gains traction, then there’s no question they could hurt the competition.”
Gap Inc. posted a 23 percent drop as Old Navy recorded a 34 percent decline. Gap North America and Banana Republic fell 18 and 22 percent, respectively. Comps for the company’s international division were flat.
“The Gap needs to make a much bolder statement in marketing,” Filandro said.
As for Old Navy, “the fun of the brand is gone. It’s lost,” he said. “They should be sitting in a perfect position, but you can’t live on price alone.”
Urban Outfitters Inc. doesn’t report monthly comps, but the retailer said Thursday it had a 1 percent dip in the quarter, with the store’s namesake brand rising 3 percent, offset by decreases of 6 and 13 percent at Anthropologie and Free People, respectively.
On the misses’ apparel front, Chico’s FAS Inc. reported a decline of 10.9 percent and Cato Corp. fell 10 percent, while rival Caché Inc. posted a 16 percent decrease.
Margaret Whitfield, analyst at Sterne, Agee & Leach, said New York-based Caché is adding denim and activewear to its mix, which is best known for its evening dresses. However, since mid-January, comps have been down more than 20 percent, she said.
“I don’t think there were any huge surprises,” said Accenture’s Donnelly. Every retailer seemed to follow their trajectory.”
Donnelly said comps might improve in November or December when year-ago figures will reflect the downturn. However, he predicted that an economic rebound might not happen until the end of the fourth quarter, or the beginning of the first quarter of 2010.
With no major buying occasions in the winter, Donnelly looked to the upcoming season. “Does spring have any life in it at all?” he said. “That is the question.”