Discounts May Hurt Retailers' December Profits

Retailers’ early deals could hurt December profits

Nov. 28 may fall only once on the calendar, but Cyber Monday came twice this year at J.C. Penney and Sears Holdings —once on the day after Thanksgiving weekend and again a week later. Ditto for Black Friday at New York’s J&R Electronics. And Target on Dec. 8 began its “Almost Last Minute Sale”—even though Christmas was weeks away. These revisions to the holiday calendar, and the discounting that accompanies each tweak, show just how determined retailers are to keep the attention of consumers this Christmas season.

Typically, stores let up on the deals after Thanksgiving weekend. Yet amid worries about lingering unemployment and the health of the economy, retailers this year are continuing to roll out discounts. That’s likely to hammer profit margins, especially for merchants facing higher labor and raw material costs. To see big promotions after Black Friday “is a bit alarming,” says Poonam Goyal, a Bloomberg Industries analyst. “Investors expected margins to be down due to inflation, but they didn’t expect margins to be down from more promotions.”

Merchants are now smack in the middle of the traditional spending lull between Black Friday weekend and the final days before Christmas. This year’s interval comes after retailers posted record Black Friday weekend sales of $52.4 billion, according to the National Retail Federation. Year-over-year sales in November increased 3.2 percent, beating forecasts.

To get those results, retailers began offering holiday promotions earlier than usual. Some Black Friday deals arrived a month before the actual day, and marketing ploys such as Black Friday Week and even Black November proved popular. “It’s a crazy time right now, with retailers willing to do anything,” says David L. Bassuk, head of the global retail practice at consultant AlixPartners. He says these nonstop promotions make December profits “highly questionable” since consumers usually flock to the items on sale. Best Buy, for example, on Dec. 13 said that earnings for its fiscal third quarter (ended Nov. 26) fell 29 percent due in part to Black Friday discounting. Its stock price then plunged 15 percent.

Industrywide, store traffic in the first week of December declined 5.9 percent from a year earlier, reported ShopperTrak. If more shoppers don’t return to stores, retailers may have to cut prices more than they’d planned, squeezing margins, says Goyal. That already began happening in the third quarter. Average gross margin, or share of sales left after deducting the cost of goods sold, for 43 retailers in the Standard & Poor’s 500-stock index, fell to 32.2 percent from 33.1 percent a year ago, according to data compiled by Bloomberg.

Apparel chains may be especially vulnerable because the clothes they’re selling now were purchased earlier in the year when cotton prices were at record highs. Third-quarter gross margins declined more than three percentage points at Abercrombie & Fitch, Gap, Urban Outfitters, and Chico’s FAS. And unseasonably warm weather has forced retailers to mark down winter clothing—potentially another hit to margins, says Ken Stumphauzer, a retail analyst at Sterne Agee. That only increases the need for retailers to lure more shoppers. And nothing draws them in like discounts.


    The bottom line: Early discounts may reduce retailers’ profit margins, which already had fallen about 1 percentage point in the third quarter.

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