Shoppers Em Quarter

Retailers are heading for their fourth-quarter reckoning.

Warm weather in December kept the shoppers away, forcing stores to mark down inventory. And when winter did decide to arrive in January, it came with the force of a blizzard in the Northeast that trapped shoppers indoors. According to Thomson Reuters, 51 retailers have already issued negative earnings guidance.

The retail earnings season is set to start Thursday when Wal-Mart Stores Inc. weighs in with its results. And for the sector overall, market watchers are expecting to hear tales of high inventory levels, slowing traffic, promotional activity and the strong dollar. Whether individual companies hit on just one of these issues or a combination, their conference calls with analysts are likely to sound like a broken record of woe.

Unseasonably warm weather in December left stores with gobs of sweaters, coats, jackets, scarves, gloves and hats. According to the Department of Commerce, business inventories rose 0.1 percent in December as sales fell 0.6 percent. Inventories for apparel and accessories stores increased 0.9 percent in December over November and 5.5 percent over a year earlier, according to seasonally adjusted numbers.

Jane Edmondson, cofounder of EQM Indexes, said she expects department stores will suffer most from the inventory glut as they ended up stuck with lots of puffy jackets. What they managed to sell was at a discount and the rest will go to off-price retailers. “Ross Stores and TJX Cos. will benefit from all these overstock items,” said Edmondson. “I believe they will have a good year.”

“The larger retailers like Macy’s were also affected by the strong dollar that hurt tourist spending and the gas savings [that] were not spent on clothes,” said Edmondson.

Alternatively, she said teen retailers are beginning to make a comeback and that “American Eagle Outfitters is doing well and so is Hollister.”

Digital conversion is another big area of focus for investors. “There was the Amazon effect this Christmas. Amazon Prime is now in half of all households,” said Edmondson. “People will be watching Wal-Mart’s online business to see if it’s grown and how much they’ve had to spend on their e-commerce efforts.”

Andrew Burns of D.A. Davidson also believes department stores will be the weakest retail category this earnings season. He agrees that inventory will be a problem for many companies; even the ones that have performed well.

“As the fourth-quarter earnings season kicks off, inventory growth remains stubbornly high. [Last quarter] represents the fifth quarter in a row where inventory has outpaced revenue growth,” said Burns. He said successful companies like Nike Inc. and Under Armour Inc. will also have to aggressively manage inventory to avoid further gross margin pressure.

Even with the negative headwinds facing the retail industry, there are still some names that seem to be performing well. Burns said that select retailers are besting lowered expectations. “Big 5 Sporting Goods posted preliminary fourth-quarter results ahead of guidance and both Steve Madden and Genesco’s Journey’s delivered positive comps,” said Burns. “In the coming weeks, we expect basic apparel retailers like Kohl’s, Target and Wal-Mart to post another modestly positive comp, but a slight deceleration from the third quarter.”

Mike Edwards, chief executive officer of eBags, said activewear would continue to dominate at retail. “It’s really the right trend. I don’t think it’s going to slow down,” said Edward, who was previously ceo of the Lucy fitness brand. Eventually, though, he said the competition in ath-leisure would lead to consolidation.

Edwards also believes Amazon is disrupting all the retailers and while it won’t be mentioned it the earnings reports, the online giant is making a huge impact. “The handbag companies that have embraced the digital revolution will do well,” said Edwards. “You’re going to continue to see fewer people in the stores.”

The Amazon threat could also be growing since the company is in the process of building its own private-label team.

If a company hasn’t mastered its online presence, that will show in its earnings. Investors will look to see if the online business is making up for the lack of store traffic. As Edwards pointed out, companies like Coach, which was slow to adapt to a digital world, are now making up for lost time.

Overall, department stores are expected to remain challenged, discount retail looks to be flat, athletic sportswear continues to shine and shoes look promising. Accessories brands that managed to capture a digital audience could turn in some positive numbers. Ultimately, e-commerce sales could be the deciding factor on retailers’ fourth quarters.

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