Retailers pulled off a pretty good holiday season after all, despite an erratic eight weeks of highs and lows, markdown mania and margin uncertainty.
This story first appeared in the December 29, 2014 issue of WWD. Subscribe Today.
They owe it mostly to their aggressive and earlier-than-ever promotions; sustained online growth; generally good weather; an extra selling day; easy comparisons to last year when winter storms blanketed the country, and huge volume surges on Thanksgiving, Black Friday, Cyber Monday and the Saturday before and the day after Christmas.
The Dow Jones Industrial Average topping 18,000, declining unemployment and lower gas prices — down $1 since June on average — also helped put consumers in the shopping spirit. The government reported last week that the economy grew at a 5 percent annual rate in the third quarter, spurring optimism for the year ahead, though the mood is offset somewhat by ongoing concerns about the absence of trends in women’s apparel, and the lack of sustained wage growth to propel spending by the masses.
Hard facts from retailers about the holiday season won’t be available until Jan. 8, when December comparable-store sales are disclosed by a small group of retailers, and the third week of February, when firms start reporting their fourth-quarter results, which will continue through late March. Retailers are expected to report single-digit sales gains of around 4 percent for the season, consistent with a projection made last fall by the National Retail Federation. MasterCard indicated last week that U.S. retail sales rose 5.5 percent from the day after Thanksgiving through Christmas Eve. But there are concerns about profit-margin erosion due to incessant promoting and markdowns, and some retailers and retail analysts early in December estimated sales gains at 2 to 3 percent.
“There was a lot of stuff given away,” observed Claudio Del Vecchio, chairman and chief executive officer of Brooks Brothers. “Consumers went out when they realized there were great deals out there. The truth about the season will be known when the quarterly reports come in. The last few days of the season were better for business but everyone was very, very promotional. We were more promotional also. I hope it gets better next year.”
Other retailers contacted this past weekend sounded less concerned, saying margins would be on par or close to last year’s. They acknowledged being more vociferous in communicating price cuts, thereby giving the impression they were more promotional without actually staging more promotions or running steeper markdowns. Still, on Sunday, deep discounting was evident. L.L. Bean offered free shipping and up to 50 percent off; Express was up to 60 percent off; MyHabit was up to 70 percent off; Rebecca Minkoff, Kenneth Cole outlets and Barneys New York were all up to 60 percent off, while Saks Fifth Avenue’s designer sale offered up to 70 percent off.
Apparel sales were very soft until close to the end of the holiday run, though outerwear and active/ath-leisure, as well as accessories, boots and jewelry, held up for the most part.
Other positive trends were evident in toys, particularly those related to the movie “Frozen”; housewares; top-priced luxury goods, with Celine and Brunello Cucinelli among the most popular labels; boots; gift cards; luggage; electronics including televisions, mobile devices and headphones, and restaurants. Other strong-selling brands were Nike, The North Face, Under Armour, Beats and the Xbox One.
For the next few weeks, retailers don’t expect major volume, with many people on vacation through the New Year, and January being a transition period for clearances and bringing in spring goods. There is greater self-purchasing compared to December and a trend toward buying familiar replenishment items. Business should gain steam in February as Valentine’s Day approaches.
Among the biggest upside surprises of holiday 2014 was the strong consumer response to the buy-online-pick-up-in-store services retailers have been rolling out over the past year.
Among the biggest concerns: consumers showing little interest in most apparel categories, too much sameness seen on the shelves and the day-to-day unpredictability of the retail business.
Looking to 2015, retailers see a few positives, namely lower unemployment, and lower fuel costs, which should help gross margins and costs. There will also be continuing double-digit gains in online sales.
Among the top challenges for 2015 are:
• Advancing omnichannel strategies and providing additional options for consumers to shop when and where they want.
• For online pure plays, launching brick-and-mortar formats.
• Merchandise innovation, working closer with developers to fight declining mall traffic, and rationalizing the brick-and-mortar footprint in an overstored nation.
“We all need to continue to look for and create more compelling gift alternatives for the consumer as they consider options in electronics and other categories that may not be the core of the business,” said Tony Spring, chairman and ceo of Bloomingdale’s. “We were pleased with the expansion of accessories, candles, some of the luxury categories, coats and cashmeres, but we need to continue to look for those businesses that are more special and gift-oriented if we want the customer to think of buying gifts in department stores. In the end, it all comes down to making the stores more distinctive. We are pleased with the progress we’ve made, but we know we have more to do next year.”
Gerald “Jerry” Storch, the incoming Hudson’s Bay Co. ceo, summarized how the season tracked for the industry overall, saying, “It was a great Black Friday weekend, particularly on the Internet. Cyber Monday was very strong, then business hit a trough and retailers and brands got a little scared. But a week before Christmas it got very strong, especially in bricks-and-mortar,” he added. “Super Saturday was a record day and the rest of the days leading up to Christmas were strong.”
Storch said Christmas 2014 could have been the best Christmas for retailers since 2007. “Women’s apparel did come on stronger, in the end.”
Outlining what made holiday 2014 distinctive, Storch cited:
• Double-digit growth online, most importantly as it relates to those with brick-and-mortar and online operations.
• Store traffic falling dramatically in some cases.
• Higher conversion rates because shoppers are “mission-oriented,” partly due to pre-shopping online.
• Smartphones being used inside and outside of stores to empower the customer with product and price awareness.
• A later Christmas rush, partly because retailers got better at delivering on time down to the wire, and consumers continued to play the waiting game in the belief that they will get the best possible deal.
“Santa Claus came. November was really strong,” said David Zant, president and chief merchandising officer of Belk Inc. He said Belk saw sales strength from Thanksgiving to the Saturday after Black Friday, then a lull through much of December. But “last Saturday, it just really opened up and carried forward all week. Week four was very substantial for us. We had an exceptional November and we are on plan for December.”
Zant added that markdowns are in line with last year. “We feel very good about margins coming out of December.”
Outerwear, sweaters, fleece, jackets, vests, active apparel and active shoes were bestsellers recently. Zant also cited Nike, Skechers and Under Armour. “Inventories are appropriate right now,” he said.
“There was no simple or straight line pacing for the business. It tended to go in spurts,” said one retail ceo. “There were good days and bad days and in the end, it was OK. I don’t think the level of promotions was that different” from a year ago. Yet the shopping pattern was different, as many consumers took advantage of Black Friday deals offered days before Black Friday itself, and many waited till the last moment to shop in hopes of getting even better deals.
The ceo also said margins would come in on plan. “If stores had been closed a couple of days from bad weather, or the weather been in the 60s for days, or if there was some catastrophic event, margins might have been severely impacted,” he said.
“As it turned out, we had a good season with midsingle-digit growth pretty evenly spread between men’s, women’s and jewelry,” said Bob Mitchell, copresident of the Mitchells Family of Stores. “We made the plan for the holiday season. A couple of our stores did better; a couple were slightly lower. Total company was on target. Jewelry is a big part of the number. Men’s tailored business was strong, even in gift-giving.”
He said Celine handbags were the biggest gift and self-purchase item. Other strong sellers were Loro Piana outerwear and sweaters and Brunello Cucinelli accessories and ready-to-wear. Mitchell said the launch of the company’s Web site in the beginning of November and the reserve-in-store service “spoke to efficiency and incremental sales.…We are trying to personalize the relationship [with the client] electronically.” Other key items were Paolo Costagli flexible wire bracelets with diamonds.
Craig Johnson, president of Customer Growth Partners, expects that much of the benefit from lower gasoline prices will go to greater gasoline consumption, but about $3 billion in savings will wind up having been channeled into holiday purchases. The fuel savings should lift seasonal buying to $593 billion, about 3.9 percent higher than a year ago and better than the 2.9 percent registered last year.
Consumer electronics, home improvement and toys have been the strongest categories of merchandise this holiday, with apparel “still sluggish,” Johnson said. “We’re in a long strong cycle for footwear, particularly boots, and performance apparel has remained strong and outerwear pretty good. Department stores were challenged this year and I think that the overhang on apparel inventory is going to take a toll on margins. Consumer electronics may have had a strong year, but they don’t have the margins built into them that apparel does.”
CGP’s field staff also noticed a revival of a practice that they hadn’t noticed since the worst days of the recession: a tendency of consumers to “monetize” their returns, taking credits rather than exchanging returned items for other merchandise. “I think this is a reflection of the bifurcation in the U.S. economy,” Johnson said. “It’s mostly true for apparel and department stores, probably because it’s not like people won’t return clothes because they’re running out of clothes to wear.”
Bill Martin, founder of Chicago-based ShopperTrak, noted that the days since Christmas have seen moderately strong traffic, with Dec. 26 likely to finish as either the fifth or sixth best traffic day of the year.
“A lot of traffic in the stores is coming from people returning goods bought online,” Martin said. “That’s turning into a good device to get people into the stores and it’s a lot easier than boxing up your gift and sending it back. A lot of stores are eager for this chance to build loyalty and provide a positive experience that builds traffic and adds to sales.”
ShopperTrak is also watching for indications of how quickly — or slowly — consumers redeem their gift cards. Martin cited research by CBE Global estimating gift-card sales hit about $124 billion this year, with about $54 billion of that in the GAFO categories — general merchandise, apparel and accessories, furniture and furnishings and other items likely to be found in department stores — that are most critical to holiday spending.
“Even if the stores get some of that quickly, it’s money they can recognize as revenue that will help their December or January numbers,” he said.
ShopperTrak expects overall holiday sales to rise 3.8 percent for the season, although its expectations for apparel and accessories are a bit more modest.
“My sense is that when all is said and done, apparel will be a bit better than people expect,” Martin said. “I think it will be up more than 2 percent, more like 3 percent, a bit closer to the overall trend.”
Arnold Aronson, partner and managing director of retail strategies at Kurt Salmon, had a somewhat different take. “Very few, if any, of the traditional apparel-driven retailers can feel really good about their holiday season sales performance,” he said. “There has been a universal shortage of compelling, knock-out fashion trends. Multibrand department and specialty stores have had to rely on maximizing their fashion accessories — handbags, shoes, jewelry, fragrances and home furnishings businesses — to keep their total comps at or above water level.
“Irrespective of lower gas prices and more favorable weather conditions, the Great Middle Class continues to face wage stagnation and has become so price-savvy and selective in their purchasing choices that most retailers have been forced into a ‘lowest price of the day’ market share battle that will negatively impact gross margin performance,” added Aronson. “But those stores who invested early and wisely in successfully developing their omnichannel capabilities will come out better than the pack on the net profit line, even in the face of low-single-digit comp-store sales.”
Apricot Lane, the Vacaville, Calif.-based apparel and accessories boutique chain, tapered off its promotional cadence after the Black Friday weekend to avoid being overly promotional from the start of the season, according to ceo Melinda Liming. The 76-store chain ran a 12-days-of-Christmas promotion that focused on a single category each day to woo customers into making repeat visits. “Once you go the direction of those big-box stores and some of those chains that have set the precedent, it’s hard to back off,” Liming said. “Several of our stores are doing buy-one, get-one-half-off, but I do think we try and save that for toward the end” of the season.
Apricot Lane saw sales up 6.5 percent in October, 5 percent in November and is expected to close out December in the high-single digits, according to Liming.
Sweaters, fleece, patterned leggings, faux-fur vests and blanket scarfs were hot-selling items. Denim sales were lackluster, according to Liming, and party dresses were hit or miss depending on the store.
Revolve, the 12-year-old online shop selling clothing for men and women, opened a pop-up shop at The Grove in Los Angeles. The 2,500-square-foot location will stay open through the third week of January. The storefront started out as an exercise in marketing, but the company is considering brick-and-mortar possibilities, said Revolve cofounder and co-ceo Mike Karanikolas.
“We’re a little smarter about our promotional strategy this year,” he added. “We made sure we had something new and exciting every day. There were less [promotions] than previous years. We knew other retailers were planning on getting more promotional than us. So it was really important for us to be able to create excitement.”
The company in the past would place thousands of items on sale at the same time, added Revolve cofounder and co-ceo Michael Mente. This year, the company focused on single categories per day instead of everything at once. Additionally, the pop-up was less promotional than the Web site, where there was more older merchandise getting marked down.
“I think the consumer is a little bit smarter and savvier and is not just shopping Cyber Monday — even though it was our best Cyber Monday ever,” Mente said. “Our customers across the board are shopping more and spreading things out and it makes it a little more digestible. We didn’t feel it was Cyber Monday or bust. There was a little bit less pressure to have one megasale in one day.”
The trick to being competitive is offering better service, said Caruso Affiliated executive vice president of operations Jackie Levy. “More so than ever, the way that shopping centers and our properties need to differentiate ourselves is service and giving back to people the gift of time,” Levy said. “There’s so many choices that people have now and especially with the online option.” Caruso Affiliated doubled its staffing this season, paying particular attention to the Santa House set ups at The Americana at Brand and The Grove.
Levy said the company’s centers are expected to end the year with gift-card sales up 20 percent. Within the luxury sector, Tiffany & Co. and David Yurman at Americana at Brand did well.
Susan Vance, Beverly Center marketing and sponsorship director, said the center’s guest services desk, staffed with multilingual workers, offers same-day deliveries and complementary coffee or espresso.
Conversion rates at the Beverly Center are estimated to be higher than last year, according to Vance, as customers continue to research online before making an in-mall purchase. According to Vance, the center has seen a “consistent and steady flow of traffic” during the holiday season with technology and women’s apparel top-selling categories.
Bloomingdale’s, Macy’s, Michael Kors and Victoria’s Secret all did well at the Beverly Center, while the fast-fashion wing — consisting of Uniqlo, Forever 21 and H&M — also drew crowds.
Last-minute shopping was robust at Target as consumers took advantage of promotions, free shipping on target.com and buy online, pick up in store. On Dec. 20, the last day of the season-long offer of free shipping and guaranteed arrival before Christmas, target.com experienced double the sales volume as Dec. 19, the last day for guaranteed arrival during the 2013 holiday period. In the days leading up to Christmas, toys and electronics were in demand the most.
“We sold more toys in stores across the country on Dec. 24 than we do during many full weeks throughout the rest of the year,” said a Target spokeswoman. “Top-selling items and brands included board games, My Little Pony, Lego, Nerf and ‘Frozen’ dolls.” The top-selling electronics products in the three days leading up to Christmas were iPads, Beats headphones, Xbox One and Playstation 4 systems.
“The five days following Christmas are the highest days for gift-card redemption in the entire year,” the spokeswoman said. After-Christmas sales on Friday and Saturday included buy-one, get-one-40-percent-off video games, 50 percent off clearance toys, 50 percent off holiday clearance items and 30 percent to 50 percent off all apparel.
Men’s retailers reported an upswing in their post-holiday sales and were optimistic for 2015.
“We had a stellar holiday season,” said Matthew Breen, co-owner and cofounder of Carson Street Clothiers. Breen said sales increased by 25 percent and the holiday season represented 15 to 20 percent of annual sales.
Bestsellers this season were sports trousers, outerwear and knits.
Rothman’s in New York City also reported a boost in sales. Ken Giddon, president, said business improved as the holiday season progressed. “The beginning of the year was solid but we weren’t breaking records,” he said. “But things definitely got better as the season progressed. The increase has to do with us doing a pretty good job making noise. We put in a women’s Olive & Bette’s pop-up shop in the retail store and that brought in some traffic.”
Bestsellers at Rothman’s this season included outerwear pieces from Colmar and Corneliani and suits from Without Prejudice.
At J.McLaughlin, which sells men’s and women’s, “We had an over 10 percent comparable store gain in December,” said Kevin McLaughlin, cofounder and creative director. For the first time, the company ran a before Thanksgiving promotion, but decided after the holiday to not add any promotions through the rest of the holiday stretch. “In a strange, counter-intuitive way, it helped us. Customers appreciated the fact we had high service, free gift wrap and a lot of clienteling.”
The week before Christmas, 75 percent of the store was full price. The week after, it was 35 percent. Higher-priced accessories such as printed cashmere scarves and cashmere gloves, resort tropical printed Catalina T-shirts, and beach-related products did best.
“I thought it was heavily promotional out there,” McLaughlin said. “When I shopped stores, I thought the pressure on price was tremendous. My takeaway for this season is that you have to have a blend of appropriate markdowns, really interesting, novel gift ideas and a nice look at spring and resort looking forward.”