'Desperate' Discounts for Retail

After a weak holiday sales season, retailers are slashing prices. But some short-term fixes inflict long-term damage

Christmas has passed, but Elizabeth Milner is getting busier. The shoe associate at Macy's (M) in Overland Park, Kan., says she's seeing even more customers this week than during the Christmas rush. That's because the store is offering an extra 30% off merchandise already reduced by half. Shave off another 10% with a pass from the newspaper, and you reap a deeper discount than last year, says Milner, when the store offered 20% off items already reduced 40%.

"There's even more traffic now than pre-Christmas," says Milner, who has worked at Macy's since 2005. "Women are after the $100 to $200 boots now going for $30."

After the most disappointing holiday sales season in five years, retailers are turning to "desperation discounting" to rescue bleak holiday sales. From early bird specials to new "power hours" and savings of up to 80%, chain stores such as Macy's and Kohl's (KSS) are trying a variety of tricks to resuscitate spending. Retail experts say that hoping for a full recovery from dirt-cheap prices may be wishful thinking, though gift-card sales could help ease the pain.

Store Shares Down

Struggling with rising gasoline prices and a collapsing housing market, many families had less to spend this year, which worries retailers who count on the holidays for up to a third of annual sales. Companies such as Wal-Mart Stores (WMT) got a head start, slashing prices at the beginning of December, but discounts weren't enough to spur greater spending. A Dec. 26 report from MasterCard Advisors (MA) said that holiday sales rose only 3.6%—near the low end of the consulting firm's expectations. Excluding gas purchases, holiday sales were up only 2.4%. Most troubling to Wall Street was the report's note that sales of women's apparel declined 2.4%.

As they have in November and December, weak sales depressed department stores' share prices. On Dec. 27 shares for Macy's dropped 3.5%, while Saks (SKS) was off 4.5%, J.C. Penney (JCP) dropped 2.7%, and Nordstrom (JWN) fell 1.3%.

Analysts suggest that given the gloomy economic climate, consumers won't be easily lured to splurge significantly post-Christmas. "People are shopped out," says Robert Passikoff, founder and president of the retail consulting firm Brand Keys in New York. "It's wishful thinking to assume all can be recovered postseason."

Layoffs Are No Remedy

Passikoff says retailers need to leave the complicated discount formulas aside and keep it simple for shoppers. He and other analysts also warn against apparent quick fixes like layoffs, which may please Wall Street in the short term but will ultimately hurt profits. "Getting rid of your best people is a losing strategy," says George Whalin, founder of Retail Management Consultants in Carlsbad, Calif. "There's nothing worse than short-staffing during the holidays."

Whalin points to electronics chain Circuit City Stores (CC), which laid off 3,400 workers and is now paying the price (BusinessWeek.com, 12/21/07). Holiday sales suffered, and Circuit City shares hit a 52-week low on Dec. 27, closing down more than 6%, at $4.30, down from $22.02 on Feb. 9.

Some retailers are hoping gift-card sales will provide relief from slumping sales. MasterCard Advisors forecast that such sales in the week after Christmas could reach $60 billion, up from $58 billion last year and $45 billion four years ago. The greatest percentage of gift cards are redeemed in January, say analysts, and redemption allows stores to post gift card sales as revenue. Wal-Mart is airing television ads for its gift cards this week, luring in consumers with the promise of no fees or expiration dates.

Tin Cup Time

Other analysts say that the weakness of the dollar and relative strength of other currencies will draw foreign shoppers to aid retailers' recovery. "In January, people start shopping for themselves and not as much for others," says Burt Flickinger III, managing director of the Strategic Resource Group, a consulting firm in New York. "So they'll get the sales, but not necessarily from Americans. Detroit and Cleveland may be hurting, but Canadians are saving the retail stores."

Flickinger says that as the season shakes out, retailers will pass losses on to brand names that supply stores, such as Liz Claiborne (LIZ). Retailers will squeeze those suppliers for lower costs as merchandise is refreshed after the holidays. "We're in desperate discounting week now, and next week is 'tin cup' week," says Flickinger. "That's when stores hit up suppliers to make up for smaller margins."

Which tactics will work for which retailers remains unclear. The majors report final December same-store sales figures on Jan. 10, and their fourth-quarter profits in February. What consumers do depends in large part on how they feel about the economy. "We've seen the consumer come through when we least expected," says Kathy Grannis, a spokeswoman for the National Retail Federation. "But all consumers need a break at some point. They only have so much to give this holiday season."

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