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Bad and Getting Worse: Retailer Worries Spiral As Comp Sales Stumble

Holiday comparable-store sales weren't quite as bad as expected, but unfortunately they confirmed one thing: Retailers are going to face a really bumpy road.

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Holiday comparable-store sales weren’t quite as bad as expected, but unfortunately they confirmed one thing: Retailers are going to face a really bumpy road this year.

Looking at comp-store sales for November and December, the overall holiday selling period wasn’t as downbeat as many retailers had feared. But both retail executives and analysts are growing increasingly nervous over 2008 with warnings of a recession — or “recession-like” conditions — as consumer spending slows to a crawl.

“Two-thousand and eight is going to be tough. Subpar growth for retail sales will persist until the labor market firms. As long as the labor market slackens and payrolls barely grow, retail sales growth will show its worst performance in years,” said John Lonski, chief economist at Moody’s Investors Service.

Consumer spending this year is expected to increase by less than 2 percent, which would be the worst calendar-year performance since 1991, Lonski said. Unless something favorable develops, there are not many reasons to be positive about consumer spending right now, he added.

After at least 18 months of robust same-store sales, some of the shine seems to be dimming in the department store sector as shoppers — saddled with higher living costs — head downstream to find bargains in a handful of specialty, off-price and mass merchants.

Meanwhile, of the retailers tracked by WWD, December same-store sales revealed what some analysts had warned: a sharp slowdown in consumer spending.

December comps declined 5.4 percent in the department store sector, while total sales for the channel dropped 5.3 percent. Mass retailers, on average, gained 1.1 percent, with total sales gaining 5.4 percent. Specialty retailers, on average, fell 3 percent, but showed a total sales gain of 5.4 percent, too.

Results came in pretty much as expected, which fueled a slight sell-off of shares on Wall Street in trading Thursday morning. But key words from the Federal Reserve Bank and a possible acquisition of beleaguered mortgage firm Countrywide Financial Corp. rallied the market in the afternoon trading session (see sidebar).

From the perspective of the consumer, who is contending with 30 percent credit card interest rates and $3 ATM fees, a spike in unemployment is causing some jitters. According to the U.S. Department of Labor, unemployment levels last month rose to 5 percent. That could continue to affect consumer spending moving forward, said Lonski.

Regarding December comps, results showed a clear pulling back from department stores. And, overall, the tallies were weak. Of the 41 retailers on WWD’s radar, 27 posted same-store sales declines, while 14 were up.

Still, the picture brightens a little when looking at the November-December period combined. A calendar shift that has dogged comp results all year shifted almost a full week of holiday shopping into November from December. Financial experts said this could have impacted December results across all channels.

On a two-month basis, net sales in the department store sector remained practically flat, increasing 0.7 percent. Net sales in the specialty sector grew 9.7 percent during the two-month period, while mass merchants increased 6.7 percent during the same eight weeks. An analysis of the published same-store sales for the two-month period show an average gain of 2.5 percent in the mass channel, a 1.3 percent increase in the department store sector and a 1.6 percent decline in the specialty channel.

Unfortunately, Wall Street likely will ignore the two-month net sales and comp averages and focus solely on the poor December results.

From a higher altitude, December results affirmed expectations. “The retail numbers leave little doubt that shoppers are in belt-tightening mode. No part of retail spending is immune right now. From stores to online retailers and lower-income to higher-income shoppers, there are signs of weakness that will persist into 2008,” said Frank Badillo, senior economist and director of the Retail Forward KnowledgeBase.

In the department store space, higher-end retailers such as Bloomingdale’s and Saks Inc. benefited from tourism dollars in areas where they operate, said Dana Telsey, chief research officer of Telsey Advisory Group. Within the channel, Telsey said designer clothes at Nordstrom appeared to be weaker than at Saks. Nordstrom Inc. reported a decline in same-store sales of 4 percent, slightly lower than consensus estimates.

Saks faced difficult comparisons to last year as well as the last few months. The company reported a 0.8 percent gain in December, which beat consensus expectations of a 1.5 percent decline. In November, Saks reported a 25.7 percent comp increase.

Macy’s Inc. declined 7.9 percent in December. The company released the average same-store sales for November and December at the same time, noting that it is a better indication of the holiday period because of the calendar shift this year. For the two-month period, the retailer said comps were down 1.1 percent.

“After a strong November, we had hoped that a more positive sales trend would continue through December. But the macroeconomic trends led customers to spend cautiously for the holiday,” said Terry J. Lundgren, chairman, president and chief executive officer of Macy’s Inc.

Neiman Marcus Group Inc. reported a 2.9 percent increase in December same-store sales. The store had been reporting comps between 4 and 8 percent over the last six months. However, in early December when it reported its first-quarter results, the retailer admitted it had overbought for fall, which resulted in some overstocks.

Moderate department stores also fell. J.C. Penney Co. Inc. and Kohl’s Corp. declined 7.5 and 0.7 percent, respectively.

“Overall, the consumer was conservative in their spending for the 2007 holiday season, as the season posted a gain of 2.2 percent — its weakest showing since 2002,” said Michael P. Niemira, chief economist and director of research at International Council of Shopping Centers. “Looking forward to January, we expect a gain of 1.5 to 2 percent as the tough economic environment lingers,” he added.

According to the ICSC, December sales grew by 0.9 percent on a comparable-store basis for U.S. chain stores versus last year.

Consumers were beset by a number of economic factors this holiday season that dragged down spending. Rising energy and food costs, a weakening employment market, the continued credit crunch and the looming housing crisis negatively affected retail traffic during the holiday season.

ShopperTrak RCT said retail traffic through Dec. 24 was down 4.4 percent year-over-year. Economic pressures and online deals could have led consumers to make as few trips as possible to retail outlets in the days leading up to Christmas, said Bill Martin, co-founder of ShopperTrak.

“Consumers clearly tightened purse strings this holiday season, feeling the squeeze of macroeconomic pressures. Traffic was sluggish throughout most of the holiday season,” said Ken Perkins, president of Retail Metrics Inc., in a note.

“December comps missed muted expectations more than not, with fourth-quarter guidance down big for most companies. Not surprisingly, a sharp deterioration in traffic was the big driver,” said Roxanne Meyer, analyst at CIBC World Markets, in a research note.

RetailForward said comps of the companies it tracks weakened to a gain of 0.2 percent. Last month, the firm’s composite showed a gain of 3.5 percent. In December 2006, the gain was 3.2 percent. According to Retail Forward’s ShopperScape survey, consumers turned out in the same numbers this holiday season, but it estimated they spent less this year than last year.

Meanwhile, the lengthy list of retailers that missed guidance for the month included AnnTaylor Stores Corp., Bebe Stores Inc., Caché Inc., Gap, Banana Republic, Old Navy, Victoria’s Secret, Pacific Sunwear of California Inc., Zumiez Inc., The Bon-Ton Stores Inc., Macy’s, Gottschalks Inc. and Kohl’s.

Ann Taylor reported a 9.4 percent decline in same-store sales, missing consensus estimates of a 1.7 percent decline and sending its stock price into a tailspin during trading over the course of the day.

Gap Inc. missed estimates at all its banners. The core Gap banner missed estimates by a significant amount, reporting a 9 percent decline. Estimates predicted comps at Gap would drop 1 percent in December. Old Navy and Banana Republic reported comp decreases of 8 and 1 percent, respectively.

Target Corp. was on plan with a 5 percent decrease, but the company had revised its guidance several weeks ago. The drop was a major stumble for the discounter, which generally has been outpacing its rival Wal-Mart. But there have been growing questions over whether Target is beginning to lose some of its cachet as Wal-Mart flexes its muscles on lower prices.

Wal-Mart Stores Inc., meanwhile, beat expectations and reported a 2.6 percent increase. The company pointed to strong food sales that pulled consumers into stores to make incremental purchases. Holiday baking and entertaining products and electronics were also strong, according to statements from the discounter. In apparel, licensed items and seasonal merchandise did well.

Off-price retailers Ross Stores Inc. and TJX Cos. Inc. reported strong comps and raised fourth-quarter earnings guidance. The retailers both reported same-store sales increases of 3 percent.

Aéropostale Inc., despite being up against an easy comparison to December 2006, beat expectations for the month of 3.6 percent to report a 12.2 percent comps gain. The company raised fourth-quarter earnings guidance, as well. Analysts had expected the teen retailer to be the big winner for the month, but estimates ranged from only 2 to 6 percent growth.

“We received an excellent response from our customers in each of our merchandise categories,” said Julian Geiger, chairman and ceo. “We are very pleased to have had significant increases in comparable-store sales, improvements in merchandise margins and reductions in clearance inventories compared to last year.”

DECEMBER SAME-STORE SALES
DECEMBER NOVEMBER OCTOBER
2007 2006 2007 2007
% Change % Change % Change
DEPARTMENT STORES
Bon-Ton -11.3 -5.8 8.6 -3.2
Dillard’s -5.0 -5.0 1.0 -7.0
Macy’s Inc. -7.9 4.4 13.4 -1.5
Gottschalks -13.8 0.6 0.4 -3.0
Kohl’s -0.7 3.0 10.2 -3.8
Neiman Marcus 2.9 7.1 5.8 8.5
Nordstrom -4.0 9.0 8.7 -2.4
J.C. Penney -7.5 2.6 2.6 -1.8
Saks 0.8 11.1 25.7 10.6
Stage Stores -7.1 2.2 3.6 -2.9
Average: -5.4 2.9 8.0 -0.7
 
SPECIALTY CHAINS
Abercrombie & Fitch -2.0 -1.0 2.0 -2.0
Aeropostale 12.2 1.7 6.6 3.0
American Eagle -2.0 13.0 0.0 -3.0
Ann Taylor -9.4 -5.3 3.9 -4.2
Banana Republic -1.0 2.0 4.0 -2.0
Bath & Body Works -8.0 5.0 -6.0 -6.0
Buckle 18.7 3.6 18.2 14.9
Cache -10.0 4.0 -4.0 -3.0
Cato -8.0 -6.0 -6.0 -8.0
The Children’s Place 2.0 5.0 3.0 2.0
Chico’s FAS -13.7 -2.0 -13.7 -10.6
Christopher & Banks -1.0 -7.0 1.0 22.0
Gap (U.S. stores) -9.0 -9.0 1.0 -7.0
Hot Topic -6.2 -5.1 -8.3 -4.0
Limited Brands -8.0 -7.0 -7.0 -6.0
Mothers Work -7.6 -0.3 0.0 -3.9
Old Navy -8.0 -10.0 -3.0 -11.0
Pacific Sunwear -2.8 -3.2 2.3 -0.8
Rite Aid -0.5 2.6 0.9 0.4
Victoria’s Secret -8.0 10.0 -8.0 -7.0
Walgreen 2.6 7.9 4.4 6.9
Wet Seal 0.6 1.3 -1.7 -5.4
Wilsons -7.1 -23.1 0.4 -21.8
Zumiez 3.9 11.5 5.6 5.1
Average: -3.0 -0.5 -0.2 -2.1
 
MASS MERCHANTS
BJ’s Wholesale Club 3.0 0.6 7.7 1.4
Costco 7.0 9.0 6.0 2.0
Ross Stores 3.0 2.0 3.0 4.0
Stein Mart -5.7 0.0 -8.9 -5.2
Target -5.0 4.1 10.8 6.1
TJX Cos. 3.0 6.0 7.0 4.0
Wal-Mart (discount stores) 2.6 1.3 1.0 2.8
Average: 1.1 3.3 3.8 2.2
 
Tally:
Up 14 26 29 15
Flat 0 1 2 0
Down 27 14 10 26
Total 41 41 41 41
 
SOURCE: COMPANY REPORTS
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