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Christmas Gets Costly as U.S. Retailers Avoid Panic

Christmas Gets Costly as Retailers Avoid Panic
The refusal by many retailers to panic and chop prices may pay off in fatter profit margins during the biggest shopping period of the year. Photographer: Jeremy Bales/Bloomberg

Wal-Mart Stores Inc., Saks Inc. and other U.S. retailers are avoiding profit-eating discounts late in the holiday season, potentially helping them wring more out of sales in the days before Christmas.

Stores have kept supplies tight, forcing shoppers to pay up for popular gifts like toys, outerwear and sweaters. The refusal by many retailers to panic and chop prices may pay off in fatter profit margins during the biggest shopping period of the year, according to Ken Perkins, president of Retail Metrics Inc.

“I’m not seeing many deals,” said Jubie Deane, a 37-year-old mother of one who paid full price for a baby toy from a Toys “R” Us Inc. pop-up store in Manhattan on Dec. 18. “I would have expected bigger discounts at this point.”

Wal-Mart, the world’s biggest retailer, has raised prices on hundreds of toys, and Saks has cut back the duration of some promotions and applied them to fewer brands than in 2009. While discounts of as much as 65 percent could still be found at some U.S. retailers on the last shopping weekend before Christmas, others were holding the line at 40 percent.

The Standard & Poor’s 500 Retailing Index rose 3.84 points, or 0.8 percent, to 510.73 at 4:05 p.m. New York time. The index has gained 24 percent this year, compared with a 12 percent increase in the S&P 500.

This year retailers discounted early and often to woo deal-hungry consumers, said Perkins, whose research firm is based in Swampscott, Massachusetts. The difference is that more of the promotions appear planned, and therefore profitable, and not designed to unload bloated inventories, he said.

“Strategic Discounting”

“Discounting seems to be more strategic than emergency,” said Michael McNamara, a vice president at MasterCard Advisors’ SpendingPulse, a Purchase, New York-based research firm.

Retailers reported strong traffic on Dec. 18, or so-called Super Saturday, which vies with Black Friday as the busiest shopping day of the year.

“We had traffic levels in general that were higher than Black Friday,” said William Taubman, chief operating officer of Taubman Centers Inc., which owns malls around the U.S.

Industry groups including the National Retail Federation and the International Council of Shopping Centers have raised forecasts for holiday spending this month as shoppers, buoyed by an improving economy, returned to the stores.

Consumer confidence rose in November to the highest level in five months as more Americans, whose purchases account for about 70 percent of the U.S. economy, put faith in improving job and income prospects.

That cheer has bumped up holiday gift budgets. Sixty-two percent of adults expected to spend the same or more this season than last year, according to an NRF survey released Dec. 15.

Full Price

Retailers are taking advantage of shoppers’ willingness to spend more and pay full price on certain items. Toy and other prices at Wal-Mart increased this month after temporary price rollbacks ended Nov. 30, Ravi Jariwala, a spokesman for the Bentonville, Arkansas-based chain, said in an interview. In past seasons, Wal-Mart took on rivals with such signature rollbacks.

Victoria Sigmon, 53, was shopping for her 10 grandkids at a Wal-Mart a few miles from her home in Dayton, Ohio.

“You go down the toy aisles and everything seems to be $20, it’s kind of a set price,” she said. “Wal-Mart has a better selection, but K-Mart I think has better prices.”

Shoppers who thronged the Stony Point Fashion Park mall in Richmond, Virginia, on Dec. 18 were willing to pay full price for items they wanted, according to Karen MacDonald, a spokeswoman for Taubman, which owns the mall.

Thinning Inventories

At Taubman shopping centers across the U.S., stores have been reporting thinning inventories of popular items, she said. For example, stock of women’s shoes and apparel at the Westfarms mall in Farmington, Connecticut, has been running low for the past week.

“Shoppers are having to trade up, which is great for the stores,” COO Taubman said in an interview today.

Coach Inc., Urban Outfitters Inc., Zumiez Inc. and Los Angeles-based Guess? Inc. are retailers with “pricing power,” which will help them through the holidays, said Christine Chen, an analyst with Needham & Co. in San Francisco.

“Because their brand is hot and they have really clean inventories, if you want it, you are going to have to pay full price for it,” Chen said. “It’s not like you are going to see nothing on sale there, but you are not going to see blanket 40 percent off the entire store.”

Widening Margins

New York-based Coach has sold out of $498 gathered leather Sophia satchels in cream and in gray on both coasts and online, she said, while Urban Outfitters’s Anthropologie chain has run out of a $398 “Chocolate & Coffee” coat in small sizes. At Everett, Washington-based Zumiez, some graphic skateboards are gone, as are some twill pants at Guess?, she said.

Some retailers are already pointing to widening gross profit margins -- the percentage of sales left after the cost of goods sold. Last month, Saks projected that its gross margin for the second half of the year would be as much as 39.7 percent, surpassing its August projection of 39 percent at most.

U.S. retailers will post an average gain of 11 percent in fourth-quarter earnings per share, excluding some items, according to analyst estimates compiled by Retail Metrics. That’s higher than the average 9.6 percent gain estimated on Nov. 12, Perkins said. Analysts began moving up projections after sales accelerated in the first two weeks of November and in the days after Thanksgiving, he said.

Less Prosperous

Not all retailers are prospering this season. Best Buy Co., the world’s largest consumer-electronics retailer, said last week that profit growth will shrink this year after television sales fell short of expectations. Talbots Inc., the Massachusetts-based women’s clothing retailer, probably will post a quarterly loss after its fashions failed to draw customers, analysts predict.

“So far the consumer has blinked first, and everyone is kind of giddy,” said Robin Lewis, Chief Executive Officer of the Robin Report, a retail industry newsletter. “But we are rounding the turn into the final stretch, and retailers that didn’t do so well over the weekend are going to panic, and they are going to be dumping merchandise.”

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