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Holiday’s Aftermath: Squeeze on Profits

Retailers ramped up promotions in December to compensate for uneven holiday sales, according to U.S. chains reporting comparable-store sales results Thursday.

A Buckle store

Profit margins be damned.

This story first appeared in the January 4, 2013 issue of WWD.  Subscribe Today.

Retailers ramped up promotions in December to compensate for uneven holiday sales, according to U.S. chains reporting comparable-store sales results Thursday — and the impact on their bottom lines will be visible when they report their quarterly numbers next month.

With the fiscal cliff deadline looming, the after-effects of Hurricane Sandy lingering and the Newtown, Conn., shooting consuming the headlines, spendthrift shoppers cherry-picked their purchases last month and flocked to stores offering the biggest deals.

RELATED STORY: Steep Markdowns Improve Holiday >>

“The level of discounting was similar to 2008 levels,” said Citi retail analyst Deborah Weinswig. “I really worry about what everyone’s margins will look like in the fourth quarter. Luxury really struggled.”

Buoyed by steep, unplanned promotions, December comps rose 4.5 percent, according to the International Council of Shopping Centers. That helped make up for November’s weak 1.7 percent gain, but profits will be hit. Heavier-than-expected promotions caused a handful of retailers, including Kohl’s Corp., Macy’s Inc., The Wet Seal Inc., Target Corp. and Cato Corp., to issue fourth-quarter earnings guidance Thursday that came in below Wall Street’s earlier projections.

Kevin Mansell, Kohl’s chairman, president and chief executive officer, summed up the situation like this: “December sales were lower than planned. Additionally, sales came late in the holiday shopping season and, as a result, were at deeper discounts than planned. We are taking the necessary markdowns in the fourth quarter to manage our inventory as we transition into the spring season.”

Only value-oriented retailers The TJX Cos. Inc. and Ross Stores Inc. raised guidance.

RELATED STORY: December Comp Crux >>

Despite the profit worries, retail stocks mostly gained ground Thursday. The S&P 500 Retailing Industry Group rose 0.4 percent, or 2.79 points, to 665.18. Among the apparel retailers perking up were Ross, up 8 percent to $58.78, and TJX, ahead 3.3 percent to $44.58. Among those losing ground were Macy’s, down 2.2 percent to $37.47, and Wet Seal, off 1.4 percent to $2.75.

Weinswig called out Kohl’s for taking its quarterly earnings per share guidance down to a range of $1.60 to $1.62 from the $2 to $2.08 previously projected. The analyst said Kohl’s registered a 60 percent comp rise at the end of month, which helped it eke out a 3.4 percent gain for December.

Although Nordstrom Inc. recorded an 8.6 percent comp gain — one of the month’s best — Weinswig said the upscale retailer’s results were also juiced by “unplanned discounts.”

“Nordstrom never discounts,” she said, noting that just 10 days before Christmas, Nordstrom had Ugg boots marked down as much as 50 percent, and select designer clothes marked down 60 percent.

“Some say this month was a dose of reality,” Weinswig offered and pointed to the softness of November. “Nobody really understood what happened in November. There’s definitely a bit of malaise out there. I don’t have a great answer.”

Soon Wall Street’s going to have to read the tea leaves by quarter for many of the key broadline players as more and more retailers stop reporting monthly comps. Target, Kohl’s, Nordstrom and Macy’s all stop after next month.

The broader retail trend continued to play out in holiday sales, with stronger players picking up market share as struggling chains continued to search for the right formula.

“The results were mixed; there were some good performances and there were some questionable performances,” said Michael Brown, a partner in the retail practice of consulting firm A.T. Kearney. “This is indicative of a slow growth, highly competitive environment.”

While Brown downplayed the impact of the deep discounting on fourth-quarter margins, he noted that retailers need to “get much more aggressive” in the period immediately before and after Christmas.

“Retailers need to give consumers a reason to come to the store,” he noted. “It doesn’t have to be in the form of a promotion. It needs to be something to get consumers into the store.”

Even though consumers are spending more time shopping online, retailers need to incorporate their brick-and-mortar locations, he noted.

“Online shopping is very targeted, very item-driven and very transactional,” Brown said. “With in-store shopping, you can attract consumers to buy other things. You miss a lot of selling opportunities with online shopping.”

Brown said a sophisticated omnichannel strategy is what will drive a retailer’s success in 2013.

Macy’s is just one of the company’s hitting the omnichannel button.

Terry J. Lundgren, Macy’s chairman, president and ceo, said: “Our new process for satisfying store and online orders through both our online fulfillment centers and fulfillment stores led us to make better use of our inventories and drive sales that otherwise would have been lost when we ran out of stock locally in certain items.”

Macy’s comps rose 4.1 percent for the month, but the firm said fourth-quarter earnings would range from $1.70 to $1.75, including 21 cents in one-time costs for a debt tender offer and store closings. That puts earnings just below the $1.98 analysts were projecting.

As retailers suffered their holiday hangover, even online got tinged by the blahs. ComScore Inc. said total e-commerce sales for November and December rose 13.8 percent versus a year earlier to $42.29 billion.

“This year’s growth rate is essentially on a par with last year’s,” said Gian Fulgoni, chairman of ComScore, “But despite many positives for the online sector, this year’s season did not quite perform up to our expectation for growth rates in excess of 16 percent as we fell a billion dollars short of our expected total of $43.4 billion.”

Many chains are still seeing dramatic growth online. American Apparel Inc.’s December comps rose 14 percent, with a 9 percent increase in its stores and a 59 percent gain in its e-commerce operations.

The rapid growth of e-commerce shows just how quickly consumer behavior is evolving.

“Retailers that adapt and change their behavior will do well,” said Barbara Kahn, director of the Jay H. Baker Retailing Center at the Wharton School of the University of Pennsylvania.

Combine retail innovation with an improving housing market, unemployment rate and increased stability in Europe, and the retail sector might have a reason to be hopeful in the New Year. “I think there will be solid, slow growth, but you’ve got to give people a reason to shop and it can’t be because of deep discounts,” Kahn said. “Retailers have known for some time that merchandising is king. All the old lessons of retail are playing out in spades.”

Kahn pointed to Target as a company that faltered in December due to lackluster merchandise. Target, which posted a flat comp result, was poised to gain ground with its Neiman Marcus collaboration. But unlike its “brilliant” partnership with Missoni, the Neiman’s relationship “fizzled,” she said.

“Neiman’s and Target were like two diffused brands coming together,” she said. “It just never made sense.”

Target, which has marked down that collection by 70 percent, also hasn’t benefited from a lackluster electronics selling season either, according to Arnold Aronson, managing director of retail strategies at Kurt Salmon.

Aronson said there were some economic headwinds, such as rising gasoline prices and budget talks on the horizon, but described these as “an inconvenience.”

“The environment isn’t like the recession where there were lost jobs and lost homes,” he said.

At the same time, Aronson admitted that what retailers need to focus on now is managing their inventory, even if it’s at the cost of weakening profit margins.

“Retailers that were scarred by the economy aren’t going to get caught with excess inventory,” he said. “Merchandise isn’t like a fine wine. It doesn’t get better with age.”