Playing The Discount Game

Stores offering deep sales after Thanksgiving did well. But will promotions translate into profits?

For shopaholics, it was a Thanksgiving weekend to remember. Stores from Kohl's (KSS ) to Sears (S ) to Circuit City (CC ) opened their doors as early as 5:30 a.m. the day after the holiday as retailers poured on the promotions and other incentives to lure shoppers. J.C. Penney Co. (JCP )promoted $10-off coupons and three-carat diamond bracelets for $299. Target (TGT ) stores made wake-up calls to customers. But perhaps the best deal of all came from office-supply giant Staples Inc. (SPLS ). Not only did shoppers get $130 DVD drives for $40, the chain also handed out 50,000 paper shredders and 80,000 surge protectors that were essentially free.

It's as if the entire retail sector has taken a page from Wal-Mart Stores Inc., opening early and offering a range of low-priced goodies aimed at getting shoppers in the door. Everyone seems to be on board, except, that is, Wal-Mart itself. The world's biggest retailer pulled back this year on its usual post-Thanksgiving promotions in a bid to shore up margins -- only to see sales suffer and its stock suffer as a result. Even Wal-Mart seems unable to hit the brakes on the ever rising levels of deals, discounts, and enticements that have become every shopper's favorite Christmas present. Retailers hope, of course, is that once tempted inside, shoppers will buy the less-heavily discounted merchandise, too. The risk is that all the deals simply hike sales at the expense of earnings.

With Wal-Mart now on the defensive, however, one thing is clear: Discounts will continue to be the order of the day. After all, why argue with success? ShopperTrak, which tallies results from 30,000 outlets, found that sales were up a strong 10.8% compared with a year earlier on Friday, the day stores let loose with promotions. Says Marshal Cohen, chief industry analyst for marketing information tracker NPD Group Inc.: "It's very evident that retailers that promoted got the business."

The question is whether the hefty promos are pulling sales from later in the buying season or otherwise undercutting full-priced sales. On that mark, results look mixed. In a phone survey of shoppers on "Black Friday" -- the day many retailers traditionally move into the black -- Atlanta-based consumer researchers America's Research Group found that 73% of shoppers who went to a store for a promotional item also put other goods in their shopping cart, up from 62% in last year's survey. Researchers also found that some 60% of customers who shopped over the holiday weekend intend to return to the stores they've already frequented. "If you won on [Black] Friday, you have your best foot forward, and you're likely to do well for the season," says founder and Chairman C. Britt Beemer. "If you struggled on Friday, you'll have a tough time regaining your footing."

Yet for all the success on Friday, sales on Saturday and Sunday -- when discounts were less plentiful -- came in far weaker. Overall, the weekend's sales were up only 2.9% from last year, according to ShopperTrak. The clear lesson: Americans have learned to buy on promotion. "Retailers are training us to buy on Black Friday, and they're doing it by offering very aggressive discounts," says Edward Fox, director of the J.C. Penney Center for Retail Excellence at Southern Methodist University. "We'd be kind of foolish to ignore that, so we don't."

WHERE'S THE HOT MERCH?

So what will keep shoppers coming into the stores rather than waiting for a rush of big sales in the final days before Christmas? No surprise there: Retailers have a wave of promotional offers planned for the weeks to come. Bloomingdale's (FD ) has mailed out coupons to shoppers for $25 off any $100 purchase next week. At Restoration Hardware (RSTO ), which has done little discounting so far, customers will get 20% off their entire purchase on Dec. 5 and 6. And CompUSA will offer hundreds of dollars off Gateway PCs and Toshiba laptops through early December.

Will it be enough? One reason price is so important is the dearth of hot merchandise. Digital cameras, iPods, and other electronics gear have earned good buzz this year, as have some luxury items such as pricey handbags and brooches. Otherwise, retail experts don't see much calling customers into stores beyond the heavy discounts.

Still, shoppers seem to be willing to open their wallets. Although gas and oil prices are high, consumer spending seems yet to be affected. On Dec. 1, the Commerce Dept. reported a 0.7% gain in consumer spending in October, the second such rise in a row. Disposable income, salaries, and wages were all up as well. Overall, marketing researchers NPD Group projects that retail sales for the holiday season will be up 3.8% this year, roughly in line with 2003's performance.

But if sales are strong, what will the blowout deals do to earnings? For now retailers remain optimistic. Many appear to be doing a better job managing their inventories and pricing than they did for many a Christmas past. They started planning these sales months ago and are largely limiting the discounts to promotional items procured at a decent price -- often from China. Staples, for example, began negotiating for good deals on cameras and electronics 18 to 25 months ago, and the chain expects to be profitable in December. Inventory levels across the board are thought to be relatively lean, minimizing the need for panic sales over the next few weeks. Retail analyst Robert F. Buchanan of A.G. Edwards & Sons Inc. expects retail profits to grow 15% for the fourth quarter. "What's driving that is very tightly controlled inventories," he says.

Of course, much depends on what Wal-Mart does in the coming weeks to regain momentum. If the retail giant cuts prices broadly, rivals could have a hard time keeping up. In electronics, where Wal-Mart held back on promotions, category killers such as Best Buy (BBY ) and Circuit City Stores Inc. kept their early discounts roughly in line with 2003 levels. They were also able to cut back on their 0% financing offers, according to Goldman, Sachs & Co. (GS ) analyst Matthew J. Fassler. But if Wal-Mart comes out swinging, such pricing discipline could fade.

But it won't be easy for Wal-Mart to slash prices. While many analysts figure the discount behemoth will do what it takes to get sales back on track, its weak November performance has left some wondering. The Bentonville (Ark.) chain faces rising labor and other costs, which are already pressuring margins. At the same time, rivals such as Target have reduced the gap between their prices and Wal-Mart's on many items. Both factors could limit the room Wal-Mart has to cut prices enough to make a difference. Says analyst Emme P. Kozloff of Sanford C. Bernstein & Co.: "[Wal-Mart] is caught between a rock and a hard place." Even if the chain does drop prices further, the move may not be as effective at spurring sales as in the past. High gas prices may be crimping spending plans of its generally low-income customers.

The biggest shopping days of 2004 are yet to come. According to Visa, last year the biggest day was Dec. 23, when procrastinators shelled out $4.3 billion. That leaves lots of hunting and gathering to be done before it becomes clear who this holiday's winners and losers will be.

By Nanette Byrnes in New York and Wendy Zellner in Dallas, with Louise Lee in San Mateo, Calif., Ann Therese Palmer in Chicago, and bureau reports

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