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A Holiday to Forget: Retailers Experience Aftershocks

After Christmas, returns, rummaging through racks and racks of discounted apparel and self-purchasing ruled the day.

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Macy’s 34th Street showcases its "Believe" letter-writing campaign to Santa.

Steve Eichner

Picky consumers left stores with few shopping bags.

Picky consumers left stores with few shopping bags.

Steve Eichner

Holiday discounts.

Holiday discounts.

Steve Eichner

Returns, rummaging through racks and racks of discounted apparel and self-purchasing ruled the day at stores across America in the post-Christmas stretch of the holiday season.

That left retailers feeling frustrated and disappointed about the outcome; even more concerned about the impact on fourth-quarter profits than they were earlier in the month, and fretting over 2009 as the recession takes a tighter hold on consumers’ psyche and the possibility of more retail bankruptcies loom.


Yet some took solace knowing that consumers will still hit the stores, with the right incentives and even if it’s just to get out of the house with the kids and browse around. Traffic was strong in the three days after Christmas, though not strong enough to significantly alter the outlook on the season, which has been dire since early fall.

With Christmas falling last Thursday, retailers hoped the ensuing Friday, Saturday and Sunday would amount to a replay of Black Friday weekend, which saw a good uptick. But last weekend boiled down to lots of traffic and little in the way of profitable transactions.

“Stores were all packed, transactions were low, and it was all on sale,” said one chief executive of a specialty chain who requested anonymity, as did many executives this season. “The whole game is moving inventory.”

With winter inventories still piled high and traffic winding down, retailers are in a quandary over convincing consumers to shop resort and spring merchandise, which is already trickling onto the selling floors at full price, while winter goods are still available at great price reductions.

FORECASTING 2009

Compounding their concerns were last weekend’s litany of dismal reports projecting continued tough times next year, and double-digit declines across several categories for holiday ’08. On Jan. 8, retailers will report December comparable-store sales, providing a clearer picture on the holiday season. Aside from two bursts of traffic — Black Friday weekend and the three days before and after Christmas — holiday 2008 will be recorded as a monumental downer, and the worst Christmas in decades. The deepening recession, job worries, a shortened calendar from Thanksgiving to Christmas, and bad weather through northern regions of the country the weekend before Christmas combined to create the perfect storm.

 

Among the prognosticators, Standard & Poor’s projected sales of general merchandise, apparel, furniture/home furnishings and other categories declining about 5 percent in 2009, with unemployment rising to 8 percent for the year on average, peaking at 8.3 percent in the fourth quarter, from the current 6.7 percent rate. House prices are expected to fall further, with an expected peak-to-trough decline of approximately 30 percent, S&P said.

Consumers, like retailers, are conserving cash, meaning less discretionary spending. S&P projected the savings rate to average 4.2 percent in 2009, up from 1.8 percent this year.

“Unfortunately for retailers, economic drivers are worsening for the most part, and we think this recession will last through the first half of 2009,” S&P said.

In the tough environment, there will be some winners, which S&P listed as Wal-Mart Stores Inc., Dollar Tree Inc., Family Dollar Stores Inc., GameStop Corp., Guess Inc., The TJX Cos. Inc., Ross Stores Inc. and Buckle Inc. With gas prices declining precipitously, consumers are encouraged to hit certain stores. Hypermarkets and supercenters, with their “ever-expanding array” of food and general merchandise, will gain appeal, as consumers trade down, even from Target Corp., S&P said.

Another strong low-price performer recently has been Forever 21 Inc., which has played well with America’s bargain-driven consumers. “Right now customers are more value-oriented than ever, so it’s a great time for us,” said Larry Meyer, the retailer’s senior vice president and chief financial officer. “This year, with Christmas on a Thursday rather than a Tuesday like last year, we had hoped that more people took Friday off. The malls certainly seemed to see good foot traffic, and our stores benefited from that,” added Meyer.

However, the general consensus is that 2008 saw more losers than winners and that 2009 will see many retailers still struggling. Among the market share losers cited by S&P are AnnTaylor Stores Corp., due to higher-priced stores discounting; Nordstrom Inc., due to its less aggressive pricing, and Sears Holdings Corp., because of its dependence on big ticket home appliances, which aren’t moving, and limited success remerchandising its softer side.

In addition, the outlook for department stores is “negative.”

“This could have been the last gasp before January, February and March set in,” said one department store executive, recapping last week’s results. “The customer is there but it takes great value to get them to come in. The same old, same old is not going to work.”

The ceo characterized last Monday, Tuesday and Wednesday as “very strong days,” while the day after Christmas was “spectacular,” he said. “But I can’t tell you if it was enough. People were very focused and very specific on what they wanted to buy. They’d ask, ‘Where’s the Juicy jewelry?’ There was a tremendous amount of self-purchasing and numerous returns.”

Excluding auto and gas sales, retailers’ sales fell as much as 4 percent during the holiday season, on a same-store basis, as the weak economy and bad weather created one of the worst holiday shopping climates in modern times, according to SpendingPulse, a service of MasterCard. Total sales were down anywhere from 5.5 percent to 8 percent. As Michael McNamara, vice president of Research and Analysis at MasterCard Advisors, said, “We had a very difficult economic environment. Weather patterns were not favorable toward the end of season, and that resulted in one of the most challenging economic seasons we’ve seen in decades.”

 

DOUBLE-DIGIT DECREASES

SpendingPulse released some stunning declines: women’s apparel sales fell 22.7 percent; men’s clothing sales were off 14.3 percent, and footwear sales fell 13.5 percent, with specialty and department stores dropping around 20 percent on average. The declines were even higher at electronic and appliance chains, which fell 26.7 percent, and were even steeper at luxury and fine jewelry stores, which, in the early days of the recession, seemed to be weathering the storm, but in the end declined 34.5 percent during holiday. Online sales benefited from the bad weather in the northern U.S. just before Christmas. E-commerce sales ended down 2.3 percent, but rose 1.8 percent in the final two weeks of the holiday season.

The holiday sales season can account for up to 40 percent of a retailer’s annual revenue. SpendingPulse’s figures did not include post-Christmas sales, which can be significant due to gift card redemptions and steeper markdowns to draw traffic. However, there were far fewer gift cards sold this holiday, partially because consumers were concerned that some retailers might go bankrupt and then they would be unable to redeem them. Some of those concerns were spurred by misleading reports on the Internet.

Along with the severity of sales declines, there’s equal concern over the impact of the acutely promotional environment and its affect on fourth-quarter profits.

Last week, 60-to-70 percent off signs reigned on winter goods at stores as divergent as Dress Barn to Saks Fifth Avenue, as desperation mounted to clear out fall and holiday merchandise to make room for fresh fashion. Kohl’s went as high as 80 percent on some goods, and J.C. Penney, in what it billed as its biggest ever after-Christmas sale, offered free wake-up calls to get customers out shopping early. Penney’s and Macy’s both opened extra early on the day after Christmas, with Macy’s unlocking its doors at 5:30 a.m.

The early openings only perpetuated retailers’ whatever-it-takes attitude prevalent throughout the season. Apparently just a few days before the holiday, Target decided to extend Christmas Eve store hours at approximately 500 units. The stores, which normally close at 6 p.m., stayed open to 7 p.m. “Traffic was pretty steady throughout the day,” a Target spokesman said. “The explanation behind extending the store hours is that we did it for customer convenience and to continue the momentum of the holiday. There was a rush for last-minute gift items.”

During the daytime hours of Christmas Eve, consumers shopped primarily for toys, electronics and gift cards. “When we report monthly earnings, we’ll see that, for a variety of reasons, [consumers] altered their shopping patterns for the holiday season, whether that means delaying the shopping or spending less money,” the spokesman said. “This season in particular, with worries over job security, mortgages and the rough state of the economy, was a tough season.”

At both hard and soft goods stores, giveaways or “bundling” were commonplace, meaning if a customer bought a computer, he could get free printer with it — even at one of the hottest stores of the season, Apple.

 

SOME WINNERS, MORE LOSERS

Still, while holiday 2008 will be recorded as one of the worst, if not the worst, in decades, there were some winning products and categories. Aside from some off-pricers and discounters showing gains, retailers this past weekend told WWD there were some strong selling brands, notably North Face and Uggs. Gloves and scarves, typically strewn across makeshift displays and crowding main floor aisles, and a range of deeply discounted designer goods from Elie Tahari to Magaschoni and Stuart Weitzman to Jimmy Choo also caught the eyes of fashion customers.

Cosmetics picked up last week, but was disappointing most of the season. The category remained regular-priced for most of the season, as usual, and was upstaged by widely marked-down apparel and accessories. To gain some attention from the shopping hordes, retailers and beauty firms discounted some gift sets for the first time ever.

Gift cards were another big disappointment, with sales declining after heady growth over the last five years.

The most recession-riddled sector was luxury, with high-end national chains and single-unit designer boutiques reporting steep declines.

“It was not the best season we ever had, needless to say. The Madoff debacle added more negativity,” said Henri Barguirdjian, president of Graff in the U.S., referring to the investment scandal involving financier Bernard Madoff. “Given all that, we ended up much better than we thought we would. We revised our year-end budget when the economy started to tank, set up new objectives and reasonably passed them. That’s the good news. The more concerning news is we passed it with a much higher percentage of very big transactions, in the seven figures, while those in the $150,000 to $300,000 range — the bread and butter — tanked. If those larger sales don’t happen in 2009, we will really be left hanging.

“I’m worried about 2009. We deal with the super-high-end, and more regular clients, if you will, making $200,000, $300,000, $500,000 a year who are not spending money because they have been tremendously affected by the economy. The first quarter of 2009 will be tremendously challenging for everybody. This is not the first financial crisis. This won’t be the last, but it took everyone by surprise. We are in a new world where things happen much faster with much wider impact.”

The haves are spending more like the have-nots. “We’re giving each other one big gift instead of several little ones because we all have so much stuff,” said Kim Schlegel Whitman, a socially prominent Dallas author of books on entertaining.

“Even some of the women who have millions and millions are rethinking their purchasing,” said Bobbie Baldrige, buying coordinator for Tres Mariposas, an upscale specialty store in El Paso, Tex. “One looked at a St. John cardigan set for $1,300 and said, ‘I think I’ll just wear the one I have in my closet.’”

Sales were down only about 5 percent so far this month at Tres Mariposas, she said. Scarves and fashion jewelry did well but traditional gift categories of fine jewelry, handbags and furs all were off.

Connie Sigel, owner of Elements upscale boutique in Dallas, said she was unnerved by shoppers demanding discounts. “This year was weird — people were surlier and almost disrespectful,” she observed. “I had a man come in to pick up three gifts that were all wrapped up for his wife and he said, ‘What kind of deal are you going to give me?’ I felt like a hostage.”

New receipts of colorful spring sportswear and dresses sportswear have been selling at full price, she noted, including looks by Rory Becca and Mint by Jodi Arnold. But it’s been harder to move fall clearance discounted 40 to 70 percent because the “pack mentality” wants 75 percent off, she reasoned.

“It’s troubling because you have to get rid of the stuff,” she said. “It was really hard on us when Neiman’s started discounting.…At the end of the day, people don’t want sales. When you mark it down it makes it less desirable. Sale is not the way to run a business, and I hope Neiman’s and everybody else realizes that.”

Brian Bolke, owner of luxury store Forty Five Ten in Dallas, said he didn’t get the burst he expected in the days before Christmas. “People were in a mood,” he observed. “Men were not as generous as they normally would be, and women weren’t asking for what they normally ask for. My reasoning is that there was such media overload and discounting hype that it kind of turned a lot of people off.”

Some people shopping the sale racks asked for discounts beyond the 60 percent marked, he noted. “We said no,” Bolke said. “We have differentiated our product and assortment where we feel we can do that.”

“People are buying one or two things versus a whole bunch,” concurred retail analyst Jennifer Black of Jennifer Black & Associates. “They are very specific as to what they are buying. Holiday 2008 may go down as one in which the consumer psychologically reached a tipping point in which enough was really enough. What it means to us is the intensification of more focused, deliberate, budget-based consumer spending. It suggests to us that only those who are differentiated to provide what the consumer is looking for and tightly managed financially will be able to benefit in the longer term from the current economic headwinds.

“A lot of smaller retailers, the mom-and-pops, will go out of business, because they [count on doing] a huge business like everyone else this time of year. The national chains can hang in because they’ve got a lot of cash. As far as her take on the bottom line for the season, Black concluded, “We believe this Christmas will be severely lacking in profitable sales.”

Other analysts believe that some regional retailers are also in jeopardy of going out of business or declaring bankruptcy.

 

TRAFFIC COUNTS

Shoppers were out in force in Manhattan Friday and Saturday, with crowds particularly big at Bloomingdale’s, Saks Fifth Avenue, Macy’s and along Fifth and Madison Avenues. Southern California malls were also busy Friday and Saturday. Even with the traffic, two Saks sales associates said business was just OK.

The 3,500-space parking garage at Caruso Affiliated’s The Grove shopping center in Los Angeles was filled to capacity by 1:30 p.m. Friday, though the developer’s recently built center in Glendale, Calif., didn’t fill up. The Grove, which typically sees about 100,000 visitors a day during the holiday season, drew about 75,000 a day this year.

“Nordstrom and Crate & Barrel had a really exceptional day, Barney’s Co-Op did quite well, too,” said Caruso spokeswoman Jennifer Gordon. “We’re not a sale center, so people don’t typically come in early, though traffic improves as the day wears on.” Gift card sales at Caruso’s properties were off from last year.

At Arcade, a high-end boutique opened three months ago on Melrose Avenue in Los Angeles, “Jewelry just flew out the door for us,” said owner Rochelle Gores. “The extravagant items didn’t sell. Ball gowns just haven’t moved at all. The world moves and you’ll see fashion react as well. I think people really want something more versatile — an evening dress that cuts just above the knee, for example, that can be worn for cocktail parties or black-tie events.”

“It’s definitely not about being expensive right now,” said John Eshaya, the former buyer for Ron Herman and Fred Segal stores who launched his Jet casualwear line this year in Santa Monica, Calif. “There are a lot of young girls coming in, sometimes with their moms, and they’re spending money.” He listed top holiday sellers as scarves, pillows, flannel shirts, sweatshirts and sweatpants, all in the $50 to $100 range.

At Perimeter Mall, a regional center just north of Atlanta, shoppers turned out for deep discounts and while some used gift cards, the majority of sales came from new purchases. Macy’s, Nordstrom, Dillard’s and Bloomingdale’s drew large crowds Friday and Saturday, bolstered by early openings and doorbusters.

“We reached nearly 100 percent parking capacity around 2:30 Saturday afternoon,” said Dennis Kemp, general manager of Perimeter Mall, which is owned by General Growth Properties. “Our valet parking reached full capacity by mid-afternoon as did our customer paid self-parking area.”

Herman Heinle, president of high-end specialty retailer Gus Mayer, with locations in Birmingham, Ala., and Nashville, said most shoppers were taking advantage of steep post-holiday markdowns rather than returning or exchanging. Bridge separates, collections and contemporary sportswear sold best last weekend, while dresses, designer apparel and fur sales were sluggish. Temperatures Friday near 70 degrees deterred outerwear sales, said Heinle.

Mall of Georgia, just north of Atlanta, had higher foot traffic this weekend than Black Friday and sales were driven by department stores, said Joe Piccolo, area manager for Simon Properties, which owns Mall of Georgia. Generally, for retailers heavily dependent on Christmas sales, the day after the holiday usually generates around 60 percent of the volume of what Black Friday does, said one retail ceo.

“This weekend has really helped merchants dig out of the hole,” said Piccolo, who named accessories, electronics and gifts as the strongest categories, though apparel was tough. “There is not one major item that people just have to have this year,” Piccolo said. “Even the denim that sold was heavily, heavily discounted.”

Taubman Centers Inc., which owns or manages 24 shopping centers, said on the day after Christmas, business started out light and picked up significantly in the afternoon, based on reports from some of its retail tenants. Many discounts seen earlier in the week were repeated, while others were increased and sweetened with incentives. On average, 85 percent of people were buying and the balance were making exchanges and returns. There were “very little gift card redemptions, 10 percent or less as of 2 p.m.,” Taubman said.

At Aventura Mall, a Miami center owned by Turnberry and Associates, tourists and residents came out for discounts that ran up to 70 percent. “I’ve never seen such good markdowns in my life,” said Yamila Garayzar, vice president of marketing for the retail division of Turnberry. Garayzar said Aventura’s sales are up from last year, but declined to specify. “This year people were really expecting great sales so they held off spending the cash they would normally spend Black Friday until after Christmas.”

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