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As traffic slumps and teen-oriented stores struggle, retailers suffer worst holiday season since 2009

  • By Andria Cheng,
  • MarketWatch
  • – 01/09/2014
  • Consumer Discretionary Sector
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With the exception of a few bright spots, such as Costco Wholesale Corp. (COST), the downbeat forecasts for the holiday season have turned out to be a prophecy fulfilled.

A slew of retailers across a wide variety of industry segments, including American Eagle Outfitters Inc. (AEO), Victoria's Secret parent L Brands Inc. (LB), Pier 1 Imports Inc. (PIR), Family Dollar Stores Inc. (FDO), Bed Bath & Beyond Inc. (BBBY) and Hhgregg (HGG), have given disappointing forecasts for the quarter after ringing up disappointing holiday-season sales.

American Eagle said strong traffic and sales over the Thanksgiving weekend were not sustained, with results through Christmas week missing internal expectations and forcing the chain to offer profit-eroding discounts.

A late surge in shopping in the week ended Dec. 28 also failed to stop industrywide holiday sales from seeing their slowest growth since 2009.

L Brands, typically an outperformer, missed its December same-store-sales estimate, with a 3% increase at Victoria's Secret, its largest unit. The company said its margins fell because it, like many retail chains, had had to increase promotions.

One of retailers' big problems during the holiday season was lower traffic, as consumers increasingly used their mobile devices to conduct advance research and figure out exactly where they wanted to go, reducing the average shopping trip to a 3- or 3½-store excursion from 5 stores in 2007, ShopperTrak founder Bill Martin told MarketWatch.

Meanwhile, winter storms and icy weather throughout December also have hurt store traffic and curtailed store hours. The holiday season also was hurt because 2013 had six fewer shopping days between Thanksgiving and Christmas.

"A shortened holiday shopping season, coupled with the most promotional retailing environment in five years, sluggish consumer spending, stagnant wage growth, multiple winter storms and a shift toward big ticket durables put intense pressure on retail margins and led to uninspiring holiday sales results," said Ken Perkins of Retail Metrics.

Total December same-store sales rose 3.6%, beating expectations of a 2.6% increase, only after Costco delivered a much-better-than-expected 5% U.S. comparable-store-sales gain, according to Retail Metrics. In contrast to many of its retail counterparts, Costco reported a 4% gain in comparable traffic.

"The consistency of Costco's comp growth continues to impress as many other retailers have indicated that economic and competitive pressures have resulted in softer sales performance in the holiday period," said William Blair analyst Mark Miller. "We believe that both the strength and consistency of Costco's performance are aided by its relatively low e-commerce risk profile relative to peers."

Another bright spot was Macy's Inc. (M), analysts said. While the company's fourth-quarter sales update missed expectations slightly, it stuck to its profit outlook and guided toward a stronger 2014. The company has benefited from its tailoring of merchandise to local demand, better training employees on selling skills, and integrating its online and in-store sales.

Macy's shares jumped 7.5%.

Rival J.C. Penney (JCP) saw its shares tumble 10% on Wednesday after its sales update for the first time in four months didn't include specific numbers. That raised worries that its actual sales could disappoint. Penney stock rose 4.5% on Thursday after Piper Jaffray upgraded the stock and estimated the struggling retailer's holiday quarter same-store sales to be up at least 5%.

"Macy's was a positive standout," said Macquarie analyst Liz Dunn. "We think [Nordstrom] will report in-line results, similar to Macy's, while we expect Kohl's (KSS) to be disappointing, particularly given its Midwest concentration."

Citing record-low temperatures across the country, she added that retailers' outlook for January is negative.

Alongside American Eagle, the teen-oriented chains were among the worst performers, with both Zumiez Inc. (ZUMZ) and Buckle Inc. (BKE) also reporting December sales shortfalls.

"Teen retailers felt the most sales/margin pain this holiday season given less differentiated and more price sensitive category offering and limited benefit from fashion or category trends," said Citigroup analyst Oliver Chen, adding that American Eagle and Abercrombie & Fitch (ANF) and its Hollister chain were among the most promotional retailers during the holiday season. "We remained concerned that teen retailers are not going to be able to lower the cadence of promotions in 2014."

In fact, in the midst of "a lot of noise," including disappointing holiday sales and the rumor of a possible buyout, Aeropostale (ARO) has decided that it's no longer planning to be represented at the well-attended ICR Xchange conference next week, analysts said.

Gap (GPS), reporting its December sales late Thursday, maintained its full-year forecast even after those monthly sales fell short of expectations, coming in flat. Shares rose in the after hours.

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