Profit margins are at serious risk of becoming the first casualty in the ongoing battle for market share.
This story first appeared in the December 29, 2014 issue of WWD. Subscribe Today.
Retailers won’t crunch the final fourth-quarter numbers until February, but the early read from revenues and price promotions shows that bottom lines are in jeopardy. With some exceptions, such as the luxury sector, sales have been lackluster and even steep price promotions are not necessarily moving the needle. Consumers are continuing to gravitate toward gadgets and all things technological. When they do turn to fashion, they have more than enough brands to consider. And the vital women’s business is ailing.
Witness the third-quarter mea culpa by J. Crew Group Inc.’s Millard “Mickey” Drexler, who told WWD: “In the shopping malls, people are not going to apparel stores, but restaurants are up, active is up and nonapparel is doing OK. Perhaps there are too many apparel businesses out there with too many players — and a lack of quality and style. Women’s has been denigrated or downgraded as a category.”
Already, chains that were teetering on the edge have given up the ghost. So far, Deb Shops filed for bankruptcy, Delia’s Inc. is planning to liquidate and the Dutch brand Mexx entered receivership.
In years past, troubled companies typically would wait until January to pull the plug, keeping fingers crossed that shoppers would deliver some kind of Christmas miracle.
No such hope seems to exist today.
Most retailers took a somewhat cautious stance toward inventories as they headed into the season — but that only limits the downside.
There’s still plenty of goods that need to be moved.
Claudio Del Vecchio, chairman and chief executive officer of Brooks Brothers said last week, “There is still a lot of inventory out there. I don’t think spring is going to be better. It will be more of the same for the next few seasons.”
Del Vecchio said Brooks Brothers has been more promotional than planned, but not as promotional as department stores.
A WWD spot check of inventory positions headed into the holiday season showed that many retailers steered a relatively cautious path.
Although there were some signs of inventory gains — for good or for ill. At Nordstrom Inc., which has been adding stores, inventories were up 24.1 percent at the end of the third quarter, when sales grew by 8.9 percent. But at Ann Inc., where the third-quarter came up short of expectations, inventories were up 9.6 percent after sales decline of 1.7 percent.
(See accompanying chart for a more complete rundown of inventory levels headed into the season).
While having more inventory on hand than a year ago could be a sign of growth or a bullish outlook in a particular business, many retailers appear to have been caught with too much and have been forced to cut prices deeper than they had planned to move goods.
Price promotions in and of themselves won’t scuttle profits for a retailer, since the vast majority of stores plan on some promotional activity.
The problem arises when sales that were planned at 35 percent off before the season actually become 75 percent off to clear goods.
While it can be hard from the outside to sort out which promotions are planned and which aren’t, it’s certainly not hard to find a sale this season.
Nomura specialty retail analyst Simeon Siegel has been tracking how promotions from various retailers compare with their discounts from a year earlier.
“We noticed a meaningful uptick in the more promotional bucket as retailers made the final push into the holiday selling season,” Siegel said last week.
But there are signs that stores also are being strategic.
“We also observed many more ‘shorter’ offerings,” Siegel said of the cadence last week. “Thus far, we believe retailers have been using the levers of price and time to attempt to drive traffic. This week focused more on adding incremental targeted offerings as retailers pulled back on the time lever.”
The general promotional trend has held since Black Friday.
Roxanne Meyer, an equity analyst who covers specialty retailers at UBS, estimated that 60 percent of the sector she follows was more promotional than they were a year earlier during the first weekend in December.
“Many retailers offered blanket promotions,” she said, citing Aéropostale Inc., Ann Inc., Gap Inc. and Chico’s FAS Inc. And chains with promotions across virtually the whole store included Abercrombie & Fitch Co., Express Inc. and L Brands’ Bath & Body Works.
Meyer’s top stock pick for the holiday season was L Brands, which also owns Victoria’s Secret.
“During our store checks, the traffic levels at Victoria’s Secret and Bath & Body Works were among the best in the mall,” she said. “We think both brands’ compelling and differentiated product make them standouts in a very competitive environment.”
It’s significant that so many see product as the differentiator and not price.
But when the rubber meets the road and the goods are on the rack, price is the only lever retailers can pull.
“You can’t generate profits without generating revenues, but the revenue increases for most are going to be marginal, low-single digits,” said Arnold Aronson, managing director of retail strategies at Kurt Salmon. “In order to be able to gain whatever advance they can in what is pretty much a zero-sum competitive season, they’re going to have to promote more and they’re going to have to give the consumer more reasons to shop.”
He said that companies that have been upgrading their technology infrastructure and spending so they can take advantage of the synergies between their digital and physical presences could overcome gross margin troubles and come out of the season with a “decent result.”
Decent, not stellar.
Aronson noted the middle class still is feeling pinched and consumers are gravitating toward tech gadgets.
“That’s the fashion of the moment,” he said. “It’s a ho-hum kind of a situation. There are no real fashion attractions today that would give rise to anything close to the dynamic in technology.”
The holiday struggle to maintain margins is part of a longer-term trend for retailers.
“When you look back over the past couple of years, there are very few retailers who are driving merchandise margin dollars per square foot higher,” said Paul Lejuez, an analyst at Wells Fargo. “You’re either getting sales and have to sacrifice margin or you’re giving up sales to protect margin.”
And steep promotions don’t have the oomph they used to.
“The Black Friday promotions were kind of ho-hum,” Lejuez said. “They started early. If it’s 40 to 50 percent off, Who cares? That’s kind of an everyday thing this year.”
That only ratchets up the pressure on retailers slugging it out for a bigger piece of the fashion pie.
“It’s harder and harder to control your destiny when you’re playing in a segment that’s very competitive,” Lejuez said. “Teen [chains] are a good example of that. Women’s apparel is a good example of that. Department stores are an example of that.”