With more buyers—many with gift cards—post-Christmas, many retailers offered discounts while some pushed full-priced spring merchandise
From Standard & Poor's Equity ResearchRetailers, in our view, are hoping to make up for a lackluster holiday season by dangling slashed prices on already heavily marked-down goods as bait for post-holiday shoppers.
In 2005, 16% of holiday sales occurred in the week following Christmas, up from 10% in 2004, according to the International Council of Shopping Centers (ICSC). Standard & Poor's believes that retailers will see an influx of post-holiday shoppers who are flush with gift cards or gift certificates and who are taking advantage of even deeper discounts.
COGS in the Machine
A number of industry watchers have lowered their sales expectations in light of weak figures reported since Black Friday (see BusinessWeek.com, 12/26/06, "A Ho-Hum Holiday for Retailers"). The ICSC lowered its same-store sales growth expectations to 2.5% from 3.0%; Visa USA came down 100 basis points to 6.5% for holiday sales growth; and ShopperTrak, a customer counting and tracking provider, came down 50 basis points to 4.5%. S&P is looking for 2006 holiday sales gains of 5%, in line with our expectations at the beginning of the season.
Although a lot of news headlines are focused on revenue growth, we are more interested in gross profit dollars: revenues minus cost of goods sold (COGS). Through direct sourcing and other supply-chain initiatives, retailers can keep COGS low, so even though they discount prices, gross profit margins remain healthy.
In our opinion, retailers with sourcing expertise can price promotionally and still grow profits. Retailers we see in this camp include Limited Brands (LTD; ranked 3 STARS, hold), owner of Victoria's Secret, Bath & Body Works, and Express and Limited Stores; Aeropostale (ARO; ranked 3 STARS, hold); American Eagle Outfitters (AEOS; ranked 4 STARS, buy); Kohl's (KSS; ranked 3 STARS, hold); J.C. Penney (JCP; ranked 3 STARS, hold); and Federated Department Stores (FD; ranked 4 STARS, buy), owner of Macy's and Bloomingdale's.
Counting the Bags
Promotional pricing has to increase demand enough to offset the lower pricing for gross margin dollars to grow. We don't see this calculus at work at Abercrombie & Fitch (ANF; ranked 5 STARS, strong buy) or Gap (GPS; ranked 2 STARS, sell) specifically, or more generally, at luxury brands or mature brands.
For the past three years, the day after Christmas has been one of the top five shopping days of the holiday season, so on our trip to the malls we looked for crowds, number of shopping bags per person, as well as the scope and depth of promotional and discount pricing.
With so much riding on the post-Christmas week, retailers were pulling out all the stops, passing out fliers and sending e-mails to drive store traffic. With the local papers delivered on Christmas day, shoppers prepared for Dec. 26 with information in hand. In Eugene, Ore., Gottschalks opened at 5 a.m., J.C. Penney and Kohl's at 6 a.m., and Target and Macy's at 7 a.m. Early-bird specials added discounts of 10% to 20% from already discounted prices of up to 60% off.
Giving It Away
Our first stop was the Valley River Center, the largest shopping center south of Portland, Ore., and north of San Francisco, with more than 130 local and national stores and restaurants. Macy's, J.C. Penney, and a new Gottschalks anchor the mall, with specialty stores including Abercrombie & Fitch, Hollister, Aeropostale, Ann Taylor Loft, American Eagle Outfitters, Victoria's Secret and Bath & Body Works, PacSun, Hot Topic, and Zumiez. We believe the mall appeals to a more upscale clientele as well as local youths.
At Macy's, formerly a May's Meier & Frank location, the doors opened at 7 a.m. with early morning specials increasing savings up to an additional 15%, for a total of 60% off, and coupons for another $10.
Federated's arsenal of private-label brands—Alfani, Charter Club, and INC—were price competitive, in our view, with a few standout deals, like a $49 cashmere sweater. Macy's had reasonable stock levels, we think, with about 30% of the stock promotionally priced or marked down. Apparel clearance was minimal and seasonal merchandise was moving at 50% to 75% off. We believe that margin pressure should be minimal.
Ready for Gift Cards
Across the mall at Gottschalks, discounts had been 10% greater in the final shopping days before Christmas, and it appeared as though no further markdowns occurred since Dec. 24, excluding the early-bird specials. We believe that American Eagle successfully changed over the front of the store to early spring colors and silhouettes, hoping to capture full-priced sales by shoppers armed with gift cards—they are typically less price-resistant than shoppers using currency.
Although flannel bottoms at Abercrombie were reduced 25%, they still appeared pricey at $28, but they were the best quality we saw in the mall, in our view. Hollister was in stronger clearance mode, but the front of the store was set with early spring merchandise. Victoria's Secret had minimal markdown activity because its semi-annual clearance sale is set to begin in January. Pricing was status quo with pre-Christmas levels, although we've already received our sale catalog, and the Victoria's Secret online sale is in progress.
As for online activity, Amazon.com (AMZN) claims this was the best holiday in its history. According to comScore Networks, online spending increased 26% to $21.68 billion for the Nov. 1 through Dec. 20 period.
"The Really Big Sale" at Gap, with merchandise up to 50% off, didn't drive the kind of traffic that creates positive same-store sales, in our estimation. Across town at the Old Navy at Oakway Mall, traffic was muted as well, but we think the bargains were better, with down-and-feather puffer jackets reduced to $23.