By  on October 10, 2007

Unseasonably warm weather in September is expected to drag down same-store sales, which will be released Thursday.

This could lead to heavy markdowns this month as retailers drive traffic to clear inventory. But heavier markdowns also mean lower margins, and weaker profits. And a disappointing September could have a negative impact on holiday sales, some observers warned.

Analysts said retailers are up against a tough, year-over-year comparison. Last year, September comparable-store sales were robust as cooler weather drove shoppers to stores to pile up on apparel and other colder weather gear. This year, store traffic has been light as September temperatures were above normal for most of the United States. Last year monthly averages were the coolest in a decade. September is the most weather-driven month of the year.

"Warm temperatures (up against cool September 2006) and a post back-to-school lull are likely to result in very disappointing sales results this Thursday," said Brian Tunick, managing director of equity research for specialty retail with J.P. Morgan Chase & Co. "As October weather comparisons are even more challenging, continuing trends are likely to lead to increased markdown risk and downward earnings per share revisions."

Analysts largely expect results to show some weakness. Consensus estimates have shifted lower through September. Most expect October numbers to recover from any softness this month through higher markdown activity.

"Given our view that September comps are likely to be weak, we would expect retailers to step up promotions, leading to strong October results — albeit with questionable margin performance," stated a note from financial advisory firm Morgan Keegan & Co. Inc. in anticipation of Thursday's reported numbers.

During the past week, a handful of retailers posted same-store sales ahead of Thursday's results. The numbers were mixed. Christopher & Banks Corp. reported a 1 percent increase in September same-store sales. Deb Shops Inc. reported a 3.8 percent decline for the same period. Walgreen Co. reported an increase of 4.7 percent, but missed some estimates.

Soft September sales will be hard to recover from, sources said.

"Once an apparel retailer has a sales shortfall related to unseasonable weather, it's unlikely that they will recoup those lost sales in the following month," said Richard Jaffe, analyst with Stifel Nicolaus. "We anticipate that this will be the case in [the current] third quarter. We anticipate that managements will respond with aggressive efforts to clear fall merchandise in October, in time to set the stores for the holiday season in November. While probably successful in clearing fall merchandise and perhaps helping comp sales modestly, these efforts will likely have a negative impact on third-quarter margins."

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