Analysts are concerned about rising retail inventory levels at some stores as well as the ho-hum October sales that led to them.
After a month of balmy temperatures, October sales were forecast to be among the weakest of the year, with comparable-store results rising slightly less than 2 percent. That left retail shelves a bit heavy as holiday stocks began to arrive and put margins for the fourth quarter, beginning this week, at risk.
“Retailers planned too aggressively for fall-Halloween based on the strength experienced in the first quarter, when they were placing fall orders,” said Citi broadlines analyst Deb Weinswig, who added that weather and the “lack of fashion newness” contributed to “lackluster” traffic and comps in October.
For many retailers, these factors resulted in deep discounts, a trend that will likely run consistently through the fourth quarter.
“Inventory levels suggest an increase in promotional activity” this year compared with 2009, Morgan Stanley specialty retail analyst Kimberly Greenberger said at the Retail Marketing Society’s Holiday outlook conference last week.
“We expect specialty and department store retailers to post a holiday sales season slightly below the pace set during back-to-school,” she said. “Merchandise margins could be at risk.” Greenberger, who described her projected 2.5 percent increase for holiday as “bullish,” said an “unfavorable” calendar shift with Christmas falling on a Saturday, and the potential for the “warmest December in four years,” could “haircut December same-store sales by 1 percent.” Michelle Clark, Morgan Stanley’s department stores analyst, said her segment would be “more promotional” than 2009, but that it won’t “return to 2008 activity.”
The analysts pointed to high inventory levels at Gap Inc. and J.C. Penney Co. Inc. as “most concerning,” and said Macy’s Inc., AnnTaylor Stores Corp., Coach Inc. and Limited Brands Inc. were all “well-positioned” for holiday.
Stripping away unfavorable weather and calendar shifts, the “skittish shopper” is still at the heart of the problem, said FBR Capital Markets analyst Liz Dunn, who added that this trait is indicative of a “new era.”
“These shoppers are inconsistent from month to month,” she said. “They seem abnormally driven by appointment shopping and need a reason to shop, such as a particular holiday or a change in the weather.”
Nonetheless, the consumer’s attitude is not likely to affect retailers’ quarterly guidance when comps come out on Thursday, as October represents just 25 percent of business during the third quarter.
Retail Metrics estimated October sales could rise 1.7 percent, which would “mark the weakest monthly gain since April,” said the research firm’s president, Ken Perkins, who predicted a shopping “lull” between now and Black Friday.
“October comps represent a sequential deceleration from September across all sectors,” said Lazard Capital Markets analyst Todd Slater, who anticipates department stores will rise just 0.8 percent versus 4.5 percent in the previous jump.
“I wouldn’t categorize October as robust, but it’s not bad,” said Michael McNamara, vice president of MasterCard Advisors’ SpendingPulse. “What I really didn’t want to see was lackadaisical or worse. It doesn’t look like there’s an inventory build up quite yet.” According to SpendingPulse, which estimates total U.S. retail sales made by cash, check or credit card, apparel sales improved 8.2 percent in October versus last year, which included an 11.6 percent leap in family and teen apparel, an 8.7 percent jump in kids’ apparel and a 5.3 percent rise in women’s apparel. This was offset by a 0.3 percent decline in men’s. Department stores also took a hit, slumping 4.4 percent, while luxury and jewelry rose 4.2 percent and 5.8 percent, respectively.
Most analysts agreed that October results would likely provide retailers with little insight into future earnings, and instead generate uncertainty, as heightened sourcing costs, inventory issues and jittery consumer demand are likely to linger well past the holiday season.
Either way, “expect comp deceleration,” Slater said. “Sales will likely continue to decelerate in the fourth quarter against more difficult [comparisons], especially in December and January.”