Retailers Cut Forecasts as December Discounts Hurt Profits

Retailers of all stripes -- from home-goods merchant Pier One Imports Inc. to discounter Family Dollar Stores Inc. and luxury lingerie seller L Brands Inc. -- are providing hard evidence that the discount war that marked the holiday season will take a toll on profit.

L Brands, which owns the Victoria’s Secret and Bath & Body Works brands, and Family Dollar today cut profit forecasts after reporting disappointing December sales as promotions that failed to lure shoppers hurt margins. Pier One cut its fourth-quarter forecast after December sales trailed the chain’s expectations.

The early results are showing that the discounts -- as steep as 75 percent off at luxury department-store chain Neiman Marcus Group LLC -- didn’t generate sufficient traffic or spur enough purchases of full-priced merchandise to make up for the lost revenue. The reports also pressured retail shares, with the Standard & Poor’s 500 Retailing Index falling 0.2 percent, compared with a gain of less than 1 percent for the S&P 500.

“This was the most promotional holiday season in five years, it’s just not enticing the consumer,” Anna Andreeva, a New York-based analyst at Oppenheimer & Co. Inc., said in a phone interview. “There’s certainly no newness. The consumer’s just postponing purchasing altogether.”

Victoria’s Secret

L Brands said in a statement today that it reduced its forecast because merchandise margins were lower than expected amid promotions. Fourth-quarter profit will be about $1.60 a share, down from a previous forecast of at least $1.67 a share. Analysts projected $1.79, on average. Sales at stores open at least a year at the retailer’s Victoria’s Secret brand rose 3 percent in December, trailing analysts’ 4.4 percent average of estimates compiled by Retail Metrics Inc.

Same-store sales at Family Dollar decreased about 3 percent in December, “driven primarily by a decline in customer transactions,” according to a statement today.

Family Dollar, based in Matthews, North Carolina, said full-year earnings will be as much as $3.55 a share, reduced from a maximum of $4.15. The average of analysts’ estimates was $3.98 a share. Comparable sales in the last quarter fell 2.8 percent, more than the low single-digit range that it previously expected. Analysts had projected a drop of 1.9 percent.

Stocks Decline

Pier One, based in Fort Worth, Texas, said profit per share in the quarter through February would be 47 cents to 52 cents, down from a previous forecast for profit of at least 60 cents a share. Analysts estimated 61 cents, on average.

Family Dollar fell 2.1 percent to $64.97 at the close of trading in New York. L Brands, based in Columbus, Ohio, slipped 4.1 percent to $57.75. Pier 1 slumped 12 percent to $20.44.

Retailers offering such large promotions risk training their customers to only shop when they see a big discount, said Paula Rosenblum, a Miami-based managing partner at Retail Systems Research.

“The challenge for retailers now is they’ve created a trend and now they have to find a way out of it,” Rosenblum said in a phone interview. “That’s going to be a big conversation in boardrooms soon -- can we scale them back.”

One company bucking the trend is Macy’s Inc., which yesterday forecast earnings for its next fiscal year that was higher than analysts’ estimated. Profit per share in the year through January 2015 will be $4.40 to $4.50, the Cincinnati-based company said in a statement. Analysts projected $4.36.

Macy’s Forecast

Chief Executive Officer Terry Lundgren has kept profit growing by adding competitively priced exclusive merchandise and letting lower-level managers tailor assortments to local tastes. He’s also increased online sales by fulfilling Web orders from store inventory.

Macy’s advanced 7.6 percent to $55.80 at the close. The stock jumped 37 percent last year.

Costco Wholesale Corp., the largest U.S. warehouse-club chain, posted better-than-expected December sales. The Issaquah, Washington-based company said in a statement that comparable sales excluding fuel rose 5 percent, exceeding the 3 percent advance estimate.

Costco rose 3.9 percent to $118.51.

Gap Results

Gap Inc., the largest U.S. specialty retail chain, reported December comparable sales that were unchanged from a year earlier, according to a statement. Analysts projected a 1.5 percent gain. The company maintained its forecast for full-year profit of as much as $2.65 a share. The average of analysts’ estimates is $2.68 a share.

Sales at the Gap brand rose 1 percent, trailing an estimated increase by analysts of 2.9 percent, while Banana Republic sales were unchanged compared to an estimated 0.3 percent rise. Old Navy, which offered shoppers up to 75 percent off in December, saw sales fall 2 percent, steeper than the 1.4 percent estimated decline by analysts.

Gap, based in San Francisco, gained 2.2 percent to $40.30 at 4:40 p.m. in New York.

“The single largest issue negatively impacting sales this season and this year was the fact that there really was no large-scale or widespread fashion trend,” Howard Tubin, a New York-based analyst at RBC Capital Markets, said in a phone interview. “The only lever these guys had left to pull was the discount lever.”

Abercrombie Forecast

Teen retailer Abercrombie & Fitch Co. boosted its full-year profit forecast to as much as $1.65 a share from a maximum of $1.50 a share previously. The company cited fourth-quarter sales to date that were higher than expected and ongoing cost reduction plans. The retailer, which has had three straight quarters of sales declines, said comparable sales for the holiday period fell 6 percent.

Shares of the New Albany, Ohio-based company rose 16 percent to $38.40 at 4:53 p.m. in New York.

U.S. retail sales rose 2.7 percent in November and December, the smallest increase since 2009, Chicago-based researcher ShopperTrak said yesterday.

Same-store sales for the more than 10 retailers tracked by Swampscott, Massachusetts-based Retail Metrics rose 3.5 percent in December from a year earlier, exceeding the average estimate of analysts’ for a 2.6 percent gain.

Customer traffic in November and December declined 15 percent from the same period a year earlier, ShopperTrak said in a statement. Consumers spent $265.9 billion, resulting in a larger sales gain than the 2.4 percent increase ShopperTrak had predicted. Holiday sales have risen at least 3 percent every year since declining 1.2 percent in 2009.

U.S. retail sales rose 3.5 percent during November and December this year, led by children’s apparel and jewelry, MasterCard Advisors SpendingPulse said. The National Retail Federation reiterated on Dec. 12 its prediction that total sales will rise 3.9 percent in November and December, more than the 3.5 percent gain a year ago.

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