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Retail Sales Profitability Remains a Concern
"NEW YORK -- With few exceptions, November sales were modestly disappointing, causing many retailers to increase promotional activity and some to lower earnings guidance, according to the Retail Outlook: Holiday 2004 Update from the Equity Research Services at Standard & Poor's.Still, S&P's equity analysts believe that, with December representing as much as 50% to 55% of fourth quarter sales for some retailers, the season is far from lost. Early December results (for the week ended Dec. 5) were encouraging, with overall sales volume on Visa-branded payment cards up 19% year-over-year and up $3.5 billion over the previous week (which included Black Friday).While the year-over-year data suggests increased frequency of Visa usage for everyday purchases (about 15% of total personal consumption expenditures), the latest weekly increase may indicate that Black Friday is no longer the gauge of holiday spending it once was and that once again, as December progresses, shoppers will buy.A look at holiday weekly spending in the past few years suggests that as much as 72% of business has yet to be rung up with as much as 35% occurring in the last two weeks of the year. Since 2000, retailers have experienced increased last minute shopping following a lull early in December. Northeast winter snowstorms may have played a part in that lull, weakening results in early December for the past three years, and shifting demand to later in the month.S&P analysts continue to see top line growth of 3%, with about 25% growth in Internet sales and substantial gift card activity, which accounted for an estimated 8% to 10% of holiday spending in 2003. Its retailing equity analysts note that the International Council of Shopping Centers brought down its projection in the aftermath of weak November sales comparisons from a 3% to 4% November to December sales gain to a 2.5% to 3% increment. They believe sales growth could even approach 3.5% if consumers are merely postponing (exhibiting closer-to-need shopping behavior) purchases given the two extra shopping days. Their concern is the profitability of those sales, and given the scale and depth of markdown activity evident this early in the holiday shopping season, we are increasingly concerned that some retailers and consumer branded companies will not make fourth quarter earnings projections.As for early holiday markdown activity, Wal-Mart had long signaled to the investment community (and retailers generally) that it would refrain from steep discounts on Black Friday, analysts said. The void was filled by big box specialty retailers -- most noticeably, consumer electronic chains, such as Best Buy -- whose heightened promotional activity, in S&P analysts' view, drew consumers away from the malls, hurting specialty apparel retailers and department store anchors.When Black Friday failed to generate the sales volume many mall-based retailers bought for, promotional strategies were increased to make price/value equations more attractive for shoppers. While this strategy is meant to reduce inventory risk, S&P's analysts believe the longer-term implications are negative, as it can destroy brand image and create a commodity product, which sells based on price. After all, what consumer in their right mind will pay full price when a markdown is a week or two away?A pleasant surprise for cosmopolitan vacation destinations such as New York City is the strong influx of international travelers scouting out luxury goods and consumer electronics, as the level of the euro, coupled with the recent flurry of markdown activity offers shoppers bargain basement prices, the survey found. But despite these factors, analysts sense an overall shopping malaise on the part of U.S. consumers. Although recent trends in gasoline and oil prices are encouraging, macro conditions generally remain difficult for lower-income consumers. Luxury shoppers are frankly seeing markdown rates as steep as post-9/11 which, while not a good long-term branding strategy in their view, could create some channel shifting as typical mid-tier department store shoppers are attracted to bargains among the higher priced luxury brands.By product category, analysts continue to expect those with the most sizzle -- namely, luxury apparel and accessories and consumer electronics -- to have the strongest sales this holiday season, with growth rates in the mid to high single digit range. Circuit City, for instance, reported a comparable store sales decline for its third fiscal quarter, partly due to a less promotional strategy with regard to CDs and DVDs. That said, strong demand is expected for high-end consumer electronic products will draw consumer dollars this season. Analysts also look for select teen apparel retailers to post above-industry sales growth.In contrast, they see many basic and fashion apparel brands losing out this season. Accordingly, while they brought down profit projections for Ann Taylor, Gap and Circuit City, they raised the near term profit outlook on American Eagle Outfitter, Coach, Neiman Marcus and Saks.Finally, the analysts note that while Wal-Mart has brought down its projected December sales growth to 1% to 3% on a comp store basis, given the lukewarm November results, the company is aggressively promoting the consumer electronic and toys categories and will likely emerge from the 2004 holiday with increased market share. Visit Standard & Poor's: www.standardandpoors.com"