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After Soft Holiday, Markdowns Drive January Comps

Strong results reported by Macy's, Kohl's, Nordstrom and Gap.

Cold weather and markdowns delivered better-than-expected January comparable-store sales, giving retailers a much-needed pick-me-up after a lukewarm holiday season.

The strong results made for a nice send-off, as Kohl’s Corp., Macy’s Inc., Nordstrom Inc. and Target Corp. have opted to cease reporting monthly comps going forward. Gap Inc. said Thursday that while it would continue reporting comps, it would release results after market, instead of before the market opens. That will leave only 13 retailers reporting monthly comps.

Even as analysts lamented the lack of clarity that comps will provide moving ahead, they also largely agreed that January results hadn’t really offered up much insight into the health of retail either.

January comps expanded 4.5 percent versus last year and marked the “strongest” performance since September 2011’s 5.5 percent gain, according to the International Council of Shopping Centers.

RELATED STORY: January Comp Crux >>

The comp gains did little to help retail stocks on Wall Street. The S&P 500 Retailing Industry Group fell 0.3 percent, or 1.98 points, to 699.13. The decliners included Limited Brands Inc., off 3.3 percent to $45.68, and Gap, down 3 percent to $32.23.

“Despite worries of a ‘fiscal drag’ due to higher payroll taxes, consumers were out shopping for bargains and clearance items,” said Michael Niemira, ICSC vice president of research and chief economist, who anticipates sales to “moderate” to a 2.75 percent to 3 percent rate in February.

“This is not sustainable,” Morgan Stanley analyst Kimberly Greenberger said, of January’s strong results. “We are very, very concerned about the macro environment.”

The analyst cited higher social security and payroll taxes, as well as less-than-exciting incoming fashion trends, as upcoming headwinds.

Drilling down deeper into January results, Greenberger said retailers benefited from a long New Year’s holiday that shifted into the workweek. Mall traffic surged in the midteen range as a result and lifted flagging traffic toward the end of the month.

Cold weather, gift card redemptions and steep discounts drove customers to shop in-store or online, as they clamored to grab deals on winter apparel. Now that traffic patterns have normalized, the analyst expects traffic to “resume” to a 1 to 2 percent decline, which isn’t great news for mall-based retailers such as Gap Inc.’s namesake label.

In the midst of a recovery of sorts, the Gap is finally pulling positive comps, after more than a decade of negative trends.

“The product has looked genuinely better across all three brands, the Gap, Old Navy and Banana Republic,” Greenberger said, while noting that good product won’t be able to outweigh macroeconomic headwinds. “That probably won’t be sustained.”

David Bassuk, managing director at retail consulting firm Alix Partners, agreed that retail’s January momentum would most likely be dampened moving ahead. This is due in part to the continued “bifurcation” that is taking place between the luxury consumer and the value-conscious consumer.

Driven by strength in the stock market, the luxury shopper continues to buoy retail, as higher taxes will hamper shoppers with less disposable income, he said, adding, “2013 will be a tale of mixed results once again.”

Although the fiscal cliff issue didn’t have a “dramatic effect” on spending, upcoming budget talks in Washington, D.C., will likely play a role in continued consumer caution, Bassuk noted. The consultant also said that while e-commerce has grown extensively for retailers, it’s getting “more competitive and much more difficult to make money” in the channel.

“Shipping costs are high and consumers are expecting free shipping,” he explained, noting that with possible changes in the U.S. Postal Service’s delivery policies, rival carriers may increase their prices, which could impact online retail.

Still, it’s not all doom and gloom.

Brands that continue to deliver great product quickly are excelling, offered Nancy Liu, retail strategist at Kurt Salmon Associates.

“The dynamics of the economy means the consumer will continue to look for value,” Liu said. “Retailers that balance innovation with inventory management are prospering.”

The consultant called out Macy’s and Nordstrom for its strong merchandising, planning and promotional strategies. Both retailers pulled double-digit comp gains, 11.7 percent at Macy’s and 11.4 percent at Nordstrom.

That said, Liu noted that quarterly profit margins will likely take a hit, as many of the retailers had to run steep, unplanned promotions to clear out excess inventory.

“It’s hard now that same-store sales reporting is so spotty,” she said, as she searched for more clarity on inventory levels across the different sectors.

Liu expects more retailers to stop reporting monthly sales, now that only two department stores, The Bon-Ton Stores Inc. and Stage Stores Inc. will be reporting from the department store sector, and the largest remaining company, Target, won’t be weighing in either.

“I can see more companies dropping off,” she said. “Comps are becoming less and less of a true barometer of what’s going on in the industry.”