Behind Slower Holiday Sales Lie Larger Profits for Many Retailers

Controlling Inventories Allowed Them to Limit Discounts

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Washington and Hurricane Sandy weren't able to ruin everything for retailers this year.

While sales growth might have slowed, profits grew as retailers from Macy's to Abercrombie & Fitch controlled inventories heading into the holidays, enabling them to limit discounts.

Analysts estimate earnings per share for consumer-discretionary retailers in the Standard & Poor's 500 Index will increase about 13% in the fourth quarter, according to data compiled by Bloomberg as of Dec. 21. A year earlier, profit slipped 3.4% on a share-weighted basis.

"The retailers coming out of the holiday season on top have done an excellent job with their inventories," Megan Donadio, a New York-based retail strategist for consulting firm Kurt Salmon, said yesterday in a telephone interview. "They've planned promotions carefully to ensure profitability."

Retailers are increasingly using sophisticated analytics in planning promotions, deciding how much to order based on previous sales and industrywide demand, Ms. Donadio said. Most chains secured holiday goods months before Sandy hit in October, reducing the harm from power failures and transportation interruptions in the Northeast.

Consumers also have been resilient. While Republicans and Democrats have been unable to agree on a plan to avoid federal spending cuts and tax increases of $600 billion that would come into effect in January without action by Congress, the Bloomberg Consumer Comfort Index was little changed, at minus 32.1 in the period ended Dec. 23, near a four-year high.

Fewer deals
Ewing Concepcion, a 21-year-old student at Merrimack College in North Andover, Mass., said he spent more this holiday season while snagging fewer deals.

"I paid full price for a lot of stuff this year," Mr. Concepcion said while shopping yesterday at the Mall at Rockingham Park in Salem, New Hampshire.

Retailers have gotten better at managing their inventories in recent years, keeping them from having to resort to steep discounts to prevent merchandise from piling up. The improvement will show up in a company's gross margin, or the portion of sales left after subtracting the cost of goods.

Retailers projected to have wider gross margins this season include Ralph Lauren Corp., whose gross margin may expand to 59.2% of sales in the quarter ending Dec. 31 from 57.1% in the same period a year ago, according to the average of five analysts' estimates compiled by Bloomberg.

The New York-based apparel maker pursued a "very crisp and very direct" approach in selling holiday items in department stores, Jackwyn Nemerov, an exec VP at Ralph Lauren, told analysts on a conference call in November.

Coach Inc.'s gross margin will widen by more than 0.2 percentage points to 72.4% in the three months ended Dec. 31, analysts estimate. The margin at Macy's , the second-largest U.S. department-store chain, may be little changed at 40.9%.

Falling costs, including a 16% decline in cotton prices this year, are helping apparel sellers. VF Corp., which sells Wrangler jeans at retailers from Wal-Mart Stores to Gander Mountain, expects to post its highest-ever quarterly gross margin in the fourth quarter, Chief Financial Officer Bob Shearer told analysts in October.

Sears Holdings Corp. cut inventory levels after last year's holiday season left it with a glut of unsold clothing. The Hoffman Estates, Ill.-based operator of Kmart and Sears stores said it lowered domestic inventory by $972 million year over year as of the third quarter, ended Oct. 27. That's excluding its Sears Hometown and Outlet Stores Inc. unit that was spun off into a separate company in October.

Chief Merchandising Officer Ron Boire said on the company's Nov. 15 earnings call that there is more room to boost inventory productivity using information gleaned from its loyalty program to better tailor assortments.

More creative
Retailers have become more creative in part to cope with a season that was expected to be sluggish on the demand side. ICSC, a New York-based trade group that tracks more than 25 chains, repeated that it expects sales at stores open at least a year to climb 3% in November and December, slower than the 3.3% gain last year. The group maintained its projection that comparable-store sales for December, set to be released Jan. 3, increased 4% to 4.5%.

Retail sales grew by 0.7% from Oct. 28 through Dec. 24, MasterCard Advisors SpendingPulse said Dec. 24. Sales gained at a 2% pace in the same period a year earlier. SpendingPulse, based in Purchase, New York, tracks total U.S. sales at stores and online via all payment forms.

Sales in the week ended Dec. 22 fell 2.5% from a year earlier and foot traffic dropped 3.3%, ShopperTrak, a Chicago-based retail researcher, said today in a statement.

"It's going to be a harder season than last year," said Candace Corlett, president of WSL Strategic Retail, a New York consulting firm.

Consumers in the Northeast had to divert spending to pay for basics after Hurricane Sandy, and concerns about the fiscal cliff weighed on consumers' mood, she said. Other shoppers are no longer willing to max out credit cards, ushering in a "new era of moderate spending," she said.

Yet while they may be disappointed by the demand, retailers have worked "magic" in adjusting pricing and inventory, Ms. Corlett said.

"Retailers have built a formula that is working for them," she said. They are "understanding their shoppers and knowing the boundaries within which they can sell to that shopper."

~Bloomberg News~

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