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For retailers, the disappointments keep coming.

This story first appeared in the January 27, 2014 issue of WWD. Subscribe Today.

After an abbreviated holiday season in which unprecedented levels of promotion failed to generate increases in traffic and further depleted top-line results, stores are now facing disappointing January sales, observers say, and the inability of promotions to clear inventories as they had hoped.

Adding harsh winter weather to an already icy fiscal mix, expectations for fourth-quarter earnings and inventory levels have taken on a far more negative tone and retail shares have started 2014 by moving in reverse. After rising an eye-opening 43.9 percent in 2013 as hopes for consumer spending strengthened, the S&P 500 Retailing Industry Group has fallen back 5 percent so far this year, shedding 2.1 percent last week alone. In 16 trading days so far in 2014, the index has trended down in all but four, including the last seven in a row.

The index’s recent weakness worsened Friday in an abysmal day for the market overall. The Dow Jones Industrial Average fell 318.24 points, or 2 percent, to 15,879.11, and the S&P 500 contracted 38.17 points, or 2.1 percent, to 1,790.29. The retailing index declined 1.9 percent to end the week at 892.58.

In a single day, the Dow, S&P 500 and retail index surrendered the respective milestones of 16,000, 1,800 and 900 attained at the end of 2013. Retail last year outperformed the Dow, which rose 26.5 percent, and the S&P, up 29.6 percent.

But that was before many retailers began reporting disappointing numbers for holiday and pulling down their earnings projections accordingly. In a research note entitled “Frozen by Polar Vortex, Slow Economy,” Jharonne Martis, director of consumer research at Thomson Reuters, noted that “pre-announcements” among retailers, who will begin reporting fourth-quarter results next month, have been overwhelmingly negative. Of 92 companies — apparel and broadlines retailers among them — who have updated guidance for the quarter, 74 have lowered projections, 15 have lifted them and three have left them unchanged.

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The biggest declines among U.S. retail stocks so far this year have come from companies that needed to pull down fourth-quarter projections based on in-store and even online weakness. The Bon-Ton Stores Inc. cited “unfavorable winter weather conditions” earlier this month when it said it faced the possibility of a fourth-quarter loss. After boasting of earlier comparable-store gains, J.C. Penney Co. Inc. provided no specific numbers when it reported it was “pleased” with its holiday performance and soon after said it would close 33 underperforming stores in a cost-cutting move. Sears Holdings Corp. projected a larger-than-expected loss for the quarter when it divulged that comps in November and December were down 7.4 percent.

Lululemon Athletica Inc. reduced profit expectations after revising its comp outlook to down in the low- to midsingle digits, after initially expecting a flat quarter as it moves to recover from a problem-plagued year in 2013. On the same day, Ascena Retail Group Inc., Express Inc. and Stage Stores Inc. brought down earnings expectations, as did L Brands Inc., parent of Victoria’s Secret, based on disappointing comps.

Teen retailers struggled through 2013 and have continued to do so as 2014 gets under way. Retail Metrics Inc. expects the teen sector to collectively report a 7 percent decline in fourth-quarter comps and described it as the “weakest of any retail segment.” Fourth-quarter comps among all reporting retailers are expected to grow just 0.7 percent — 1 percent excluding Wal-Mart Stores Inc.

Aéropostale Inc. has seen its shares wither 20.1 percent this year, after declining 30.1 percent in 2013, after it canceled plans to appear at the ICR XChange in Orlando, Fla., this month, with speculation that it might be in talks to be taken over by any number of private equity players giving way to complaints among analysts about a lack of transparency.

American Eagle Outfitters Inc., considered by many to be best positioned to recapture some momentum in the teen market, turned heads last week when it said that Robert Hanson was out as its chief executive officer, succeeded on an interim basis by chairman Jay Schottenstein.

“Of the Three A’s” — American Eagle, Aéropostale and Abercrombie — “a lot of people felt that American Eagle was the strongest and Hanson had made a positive difference,” said analyst Janet Kloppenburg, president of JJK Research. “Now they have to bring in a new ceo who’ll go through a honeymoon as he or she figures out what to do with the assortment, how sharply to discount remaining inventory.

“And it’s disturbing when you see heads start to roll at good companies in any case,” she added.

Kloppenburg noted that some of the weakness in stocks in general is derived from doubts about, for instance, the strength of the manufacturing sector in China and uncertainty in many emerging markets. Retailers’ concerns are less global in nature, she said.

“Analysts, myself included, expected margins to be tough and sales to be challenging, but we figured that, with discounting, there’d be some success in working inventories down and moving the needle at least a bit in January,” she said. “But the discounts are deeper and it doesn’t seem to be generating traffic or sales, and a lot of us are beginning to look at our estimates for retailers for the first quarter, both the top and bottom line, and wonder if they need to be brought down. There’s no overwhelming fashion trend coming for spring and there are a lot of questions about inventory. There is a large body of evidence telling investors to be conservative.”

Craig Johnson, president of Customer Growth Partners, expects that final holiday numbers from the Commerce Department will point to a 3 percent gain in spending for holiday merchandise once adjusted by the government. He noted that while winter storms and the abbreviated holiday calendar hurt results last year, a more fundamental challenge was simply a lack of spending money in consumers’ wallets. The Commerce Department’s Bureau of Economic Analysis reported growth in disposable personal income of just 0.1 percent in November.

“If there’s no real disposable personal income growth, you will never have strong retail spending growth,” he said, noting that the metric ran above 3.5 percent in the years prior to the Great Recession.

He noted that the apparel business has shifted from wants to needs, with consumers more interested in subscriber-based services providing experiential value, such as cable and telecommunications providers. And, with inventories growing faster than comps at retail, promotional proclivity has lingered, driving down dollars per transaction and further limiting revenue gains.

Johnson noted that the growth in online shopping is among the factors pushing up the rate of merchandise returns to retailers, eroding fourth-quarter results further. Promotions have contributed to the growth in returns observed by Johnson and his associates.

“They tend to get people goosed up beyond what they can afford or like,” the CGP official said.

Rebecca Duval, an analyst at BlueFin Research Partners and a former retailer, said that the reluctance to pad inventories was being felt throughout the industry supply chain now, with orders being pushed back, reduced in size or in some cases canceled altogether. “The Street is going to be looking for margin recovery in the first quarter,” she said, “and it’s not going to be easy to come by. Investors are asking who has a fundamentally strong story for 2014, and there will be some winners, but a lot of the analysts’ numbers are going to have to come down for a lot of the companies they cover first.”

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