Retailers Face the Ghost of Christmas Present -Big Lots Up, Neiman Marcus Down, Others Hurting

January 2nd, 2009, I posted a blog entry to this Blog titled “The Ghost of Christmas (Just) Past as a little play on the dismal sales season. Click here to Read . At that time, one of the points made was trading down is the reality. I’m following it up now with what the retailers are facing at the moment: The Ghost of Christmas Present.

In the new retailing climate you see that in the last week’s worth of results reporting, Big Lots is up, and Neiman Marcus is down. Closeout retailer Big Lots Inc. posted a better-than-expected quarterly profit, aided by lower freight costs, and raised its outlook for the holiday fourth quarter. The retailer, which specializes in sales of excess inventory from home appliances to toys, also said it would immediately start buying back $150 million of common shares.

Conversely, upscale retailer Neiman Marcus Inc. reported sharply lower quarterly profit as worried consumers continued to avoid luxury items amid a slowdown the company expects will last for some time. Sales at its namesake Neiman Marcus and Bergdorf Goodman stores open for at least a year, or same-store sales, continued to fall, dropping 14.9 percent during the quarter. Overall comparable sales, including its direct marketing segment, declined 13.7 percent.

Neiman Marcus, in a regulatory filing on Wednesday Dec 9th, cited "a challenging economic and retail environment" that it said would likely persist for an "extended period of time." The downward sales trend has continued in the current quarter, it said. Last week the company reported same-store sales at its Neiman Marcus and Bergdorf Goodman stores had fallen 12.7 percent in November, a period that includes the busy holiday shopping weekend following Thanksgiving. Those two store chains account for about 83 percent of the company's revenue. Neiman Marcus said it experienced weak demand across all geographic areas and that its apparel and home decor categories were particularly hard hit.

Value Shopping In

Clearly, the trickle to value shopping has become a stampede.

Big Lots, which shut down its small Internet operation during the third quarter, sells merchandise that others cannot. When manufacturers are left with extra inventory due to a discontinued line or a change in packaging requirements, they call Big Lots, which will buy the merchandise and sell it in its stores at discounted rates. Big Lots has been somewhat insulated from the downturn as shoppers seek its low prices on staples like food or paper towels.

The better-than-expected results came a day after many retailers posted much weaker-than-anticipated November sales as shoppers were keenly focused on bargains. While consumers have been "very stingy" on discretionary purchases, the home category is actually one of the best performers so far in the fourth quarter, according to Big Lots.

Big Lots is reaching out to it’s customers by introducing a loyalty-card program to offer discounts to frequent shoppers during the quarter, which more than 600,000 have already signed up for, Fishman said. Early sales of Christmas seasonal merchandise, such as decorations, were tough in October, but sales of those items are up so far in the current fourth quarter, he said.

Big Lots Profit Jumps
Big Lots net income in the third quarter ended on October 31 rose to $30.3 million, or 37 cents per share, from $12.2 million, or 15 cents per share, a year earlier. Big Lots' third-quarter sales rose 1.3 percent to $1.04 billion, while same-store sales, or sales at its locations open at least two years, fell 0.2 percent.

Big Lots, which has been signing deals to open stores in better locations as other retailers close their doors, said it opened 52 new stores this year -- two more than initially planned for. It is also cutting back on closing stores, and now plans to shut just 30 locations this year instead of 40. Big Lots said it plans to keep opening stores in better spots as such locations are now available and the cost has declined. The company expects to once again open more stores than it closes in fiscal 2010 and beyond.

For the fourth quarter, Big Lots expects earnings per share from continuing operations of $1.09 to $1.14, up from its August forecast of 99 cents to $1.04. The company expects comparable store sales to rise between 1.5 percent and 2.5 percent for the fourth quarter, and said comparable sales rose in that range in November.

Neiman Marcus Experiencing Shrinking Sales and Profits
At the Luxury end of the retailing spectrum, Neiman Marcus said revenue in the fiscal first quarter, ended October 31, fell 11.9 percent to $868.9 million. The privately-held company reported a net profit of $8.5 million, down from $12.9 million a year earlier. Neiman Marcus was acquired by an investor group led by Texas Pacific Group and Warburg Pincus LLC in October 2005.

As has been the case with rival upscale retailers Saks Inc and Nordstrom Inc Neiman Marcus has maintained tighter inventory controls to avoid having to steeply discount merchandise to get it off shelves. Last year it was not uncommon to see luxury stores slash prices by 70 percent. Neiman Marcus said its comparable inventories were 22.5 percent lower in the quarter than a year earlier. Neiman Marcus wasn’t the only retailer feeling the holiday pain, though.

Slow Start to Holidays as Many Retailers Post Weak Sales
U.S. retailers from Macy's to Costco posted much weaker-than-expected sales for November as shoppers focused only on big bargains at the start of the key holiday selling season. Some, like department store operator Macy's also forecast quarterly earnings below analysts' estimates.

Out of 15 retailers that reported by early Thursday December 3rd, 11 missed analyst estimates, including Costco Wholesale, Children's Place, Walgreen and Hot Topic, according to Thomson Reuters data.

Over the U.S. Thanksgiving weekend, consumers focused mostly on promotional deals and made few impulse purchases as concerns about the economy remained top of mind, analysts and executives said. Shoppers Targeted the featured promotional Items and stayed away from impulse purchases on “Black Friday” and Cyber Monday. Store chains also blamed warm November weather, which kept consumers from buying winter clothes.
On December 3rd, Macy's shares fell 2.7 percent in trading before the market opened, while Costco declined 2.8 percent. Teen retailers Aeropostale and Abercrombie & Fitch also saw their shares sink more than 7 percent after disappointing November results. The November sales results include the day after Thanksgiving, traditionally known as "Black Friday," when retailers offer rock-bottom prices to kick off the holiday shopping season.

Early data on weekend shopping from the U.S. Thanksgiving Day on Nov. 26 through Sunday showed only a slight increase in retail sales from the comparable 2008 period, when consumers were hammered by a deepening recession and credit crisis. As of Black Friday, analysts had forecast a 2.5 percent rise in November sales at stores open one year, according to Thomson Reuters data. But estimates shrank since the weekend, and as of Wednesday, analysts expected a 2.1 percent increase. That would still be the best showing since April 2008 and compares with a 7.8 percent decline in 2008, the worst drop since data started being tracked in 2000.

Retailers Protecting Profits by Controlling Inventories
Even if sales are flat or rise modestly during the holiday season, analysts said retailers should report improved profits because they have cut inventories and pared back costs to avoid the huge discounts they were forced into last year. For example, Victoria's Secret owner Limited Brands forecast a low-to-mid-single-digit decline in December same-store sales, but said it planned to be less promotional this month. The company also posted "significantly" higher November margins, "driven by improvements in each main business," Amie Preston, vice president of investor relations at Limited, said in a recorded message.

Retail sales data are closely watched as consumer spending makes up roughly 70 percent of the U.S. economy. But the figures also give an incomplete picture because many of the retailers that are key holiday destinations, including industry leader Wal-Mart, Best Buy and Amazon.com , do not report monthly sales. Macy's said on Thursday that same-store sales fell a worst-than-expected 6.1 percent during the month. It stood by its forecast calling for quarterly earnings of $1.00 to $1.05 a share, excluding one-time items, but that was still below analysts' expectations.

Teen Retailers Mixed
Abercrombie & Fitch's same-store sales fell 17 percent, far worse than the analysts' average view of a 9.3 percent drop. Also on Wednesday the 3rd, teen clothing retailer Hot Topic posted a worse-than-expected 11.7 percent drop. Aeropostale sales came in slightly worse than expected, with a 7 percent increase. The company's quarterly earnings forecast also disappointed some investors.

Results Vary by Retailer
Costco said same-store sales rose 6 percent, missing the analysts' average estimate of 8.1 percent. Same-store sales at U.S. locations rose 2 percent.
Children's Place posted a 13 percent drop in comparable sales, including online sales, compared with analysts' expectations of a 1 percent rise. "Customers gravitated towards the sale merchandise," a company spokeswoman said in a recorded message.

Walgreen, one of the largest retailers that reports monthly same-store sales figures, on Wednesday posted a 3.9 percent rise for November, below analysts' expectations. The drugstore chain also said Thanksgiving weekend was "notably softer."

On the positive side, Limited posted a better-than-expected 3 percent increase and home furnishings retailer Pier 1 Imports cited a strong Thanksgiving weekend as it reported a 13.7 percent increase in same-store sales for its third quarter ended Nov. 28.

Walgreen’s Beats Forecast, Shares rise

Drugstore operator Walgreen Co. (NYSE: WAG) said prescription drug sales rose in the fiscal fourth quarter, pushing the company's results past Wall Street expectations and lifting shares to an annual high. Shares rose on trading today to close at $37.35, a $3.16 per share rise today, putting the stock price 9.24% higher.

Cost Cutting results in Profits

The Deerfield, Ill., company said its "Rewiring for Growth" expense savings plan started to pay off during the quarter, and also indicated the effects of the recession may be easing. Walgreen shares climbed to an annual high on the results.
For the quarter ended Aug. 31, Walgreen's profit fell 2 percent, to $436 million, or 44 cents per share, down from profit of $443 million, or 45 cents per share, a year prior. Revenue rose 8 percent to $15.7 billion from $14.6 billion.

These latest per-share results attribute 7 cents per share in savings from Rewiring for Growth, offset by 3 cents in costs. Analyst’s consensus forecast profit of 39 cents per share on revenue of $15.68 billion.

Walgreen’s said same-store sales, or sales at stores open for more than a year, rose 2.4 percent. Walgreen opened its 7,000th store in September and currently runs 7,042 drugstores, a few dozen more than main competitor CVS Caremark.

Same Store Sales Rise

Same-pharmacy sales rose 4.5 percent in stores open at least a year, while same-store sales of the "front end", or non-pharmacy items, fell 1.4 percent. The company filled 9 percent more prescriptions than it had a year ago. Even though consumers are actively looking for ways to save, Walgreen’s said fewer customers are skipping medications or stretching the terms of their prescriptions.

Walgreen’s also said that patients who receive 90-day orders of prescription drugs through the mail will now be able to pick up their orders at local Walgreen’s pharmacies, matching the features of the CVS program.

For the full reporting year, Walgreen’s earned $2 billion, or $2.02 per share, down from profit of $2.16 billion, or $2.17 per share, in 2008. Revenue rose to $63.34 billion from $59.03 billion. Walgreen’s expects store growth of 4.5 percent to 5 percent in fiscal 2010, which would give it more than 7,300 stores.

The company stated it is looking to save money by cutting back on store openings and carrying fewer products in inventory. They are going to boost sales by improving the layout of its stores in another new initiative.

Cash for Clunkers Can’t Save July Retail Sales Figures - Sales Fall 0.1 Percent

Retailers reported a rough month in July, raising concerns for how strong the recovery from the worst recession since World War II. Outside of auto sales figures, boosted by the very popular and well publicized “Cash for Clunkers” program, retailers turned in a disappointing performance in July. The Commerce Department reported retail sales fell 0.1 percent last month, a much worse performance than economists had expected.

Sales unexpectedly lower

Retail sales had been expected to rise in July, boosted by the federal government’s “Cash for Clunkers” program. Most economists expected a very slight increase in non-auto retail for July, so the 0.1 percent drop came as a surprise.

Shoppers still hesitant to open wallets

Reports from the nation’s major chain retailers showed shoppers remained cautious about spending in July, as most consumers aren’t feeling like they’ve seen the last of the recession, and job security fears dominate peoples thinking. The next hurdle for retailers will be whether shoppers will cut back on back-to-school shopping. This could be a indicator of how good the holiday season will be for retailers. Congress approved an additional $2 Billion for “Cash for Clunkers”, and retailers are hoping some of the popularity of that program will spill over into enthusiasm for spending at retail stores. Cars and light truck are selling at the best rate since last September, boosted by the government program.

Unemployment expected to climb

Economists are forecasting that the unemployment rate, which dipped to 9.4 percent in July, will rise to over 10 percent early next year. The Federal Reserve, concluding its first meeting since the economic uptick, held a key interest rate near a record low where it has been since last December and pledged to hold rates at low levels for "an extended period

Dollar Stores have the Blueprint for Profits in Current Economy

Source Article: Discounter Dollar General lifted by downturn in US | www.retail-week.com (view article)

Ramifications:

1) Value oriented retailers like dollar stores will experience growth vs Competitors

2) "Cash is King" for the Middle and Lower Middle Income Households

3) "Value" pricing and Large Store Count Means convenience for consumers

4) Other sectors should benefit from downturn, Auto Parts, Rent-to-Own among big potential winners.

Analysis:

The news that Dollar General's results are good is a direct reflection of the prevailing retail climate in the US. "Value" is winning the battle for the hearts and minds of consumers as economic uncertainty continues to be the headline.

The "Dollar Store" category is interesting in that it offers a bare bones consumer experience, private label and lesser known CPG brands, and no frills for the consumer. Exactly what families worried about current finances and future job security and shaky signals from business and the government want.

The shampoo still gets your hair clean, the kids still drink the carbonated soft drinks you can buy in 2 Liter bottles "2 for a buck".

It will be interesting to see Pepsi and Coca-Cola's volume figures, as they have tried to make a price increase stick in the face of the economic downturn. Coke went with a straight price hike, Pepsi went from 12 paks to 8 paks for 12 OZ cans. The dollar stores can give a good alternative to that.

Dollar General is a retailer that fills an urgent need right now, and the news of continued store count growth makes sense. The ubiquity of well-known Dollar Brands in suburban and working-class communities has eliminated any stigma consumers may have felt about patronizing the stores. They are convenient and provide value. Big Lots is a good bet to prosper, too.

That should lead to thinking about other retailers who may benefit from consumer sentiment and the economic climate right now. Auto Parts retailers come to mind. Cars aren't being purchased, new OR used, but people are still driving. Somethings gotta give, and I think Autozone and Advanced Auto parts could be beneficiaries of this trend; Pep Boys and other repair service chains should benefit, too.

Rent-to-own retailers Rent-a-Center and Aaron's Rents should benefit as consumer credit stays tight and consumer confidence remains low.

Retail this coming year will have some bright spots, but they will be in value-oriented main brands (Wal-Mart, McDonald's), and retailers like Dollar General and Rent-A-Center, whose offerings appeal to families who are struggling to maintain their lifestyle, when it's becoming very tough to do that.

November retail sales drop shouldn't be a surprise to most retailers.

This analysis was written for Gerson Lehrman News and published December 5

Implications:
1) Credit restrictions are going to inevitably lead to lower retail sales.
2) Economic news and what they experience has consumers nervous
3) Sales made at discount prices reduce top-line revenues, and"Super-Specials" on Black Friday create expectations of better sales.

Analysis:
The news is brutal everyday...Country in recession since beginning of 2008. (That wasn't news to the average person). General Motors(NYS:GM) looking at bankruptcy protection. Circuit City(NYS:CC) and Linens N Things in bankruptcy. Auto dealers closing all over the country. Foreclosure crisis. Global Economic slowdown.

Even the breathtaking decline in energy prices and commodities in general are a sideshow to the unrelenting economic gloom.

The US government seems to making up the "Bailout" or "Recovery Package" as they go along, as each measure they enact seems to have negligible effect on the overall problem of a severe economic slowdown.

While we're all sure that everyone at Treasury, Commerce, the Fed and all the worldwide authorities are doing their best, the overall impression to most people I know is the world governments and agencies don't have a clue as to how wide and deep the problems are.

That being said, the fact that overall sales in US retail are down in only single digits should be a positive, not a negative, sign that the US economy is more resilient and the US consumer tougher and less risk-averse than the institutions that are the causing the pain.

If there's no consumer credit, car sales will suffer. Even more importantly, if the credit score criteria for getting an auto loan stay the same going forward, the ready pool of automobile buyers will be smaller, leading to a smaller new car market.

Each and every step of this process shouldn't be reported as a fresh "disaster". It's a systemic problem.

If the average consumer can't get credit readily, home furnishing and large-ticket electronics purchases are going to fall. It's not a problem with the retailers or offerings, it's a matter of the mechanism most people use to purchase larger-ticket household items is broken. As much as US homeowners love flat-screen TV's, they love eating and caring for their families more.

So, when earnings for furniture retailers and manufacturers come out, it's not a new story of another category falling apart; it's just a continuation of the consumer credit crisis, same as the auto sales drop.

Jewelry companies are reporting lower sales, again, no surprise, just another manifestation of shrinking consumer credit. So when strip centers and malls start losing retail tenants and commercial mortgages become the next crisis, it's still the same story.

The US consumer should be congratulated for what they've been able to accomplish, even in this very tough economic time. They are trading Macy's( :M) for Wal-Mart(NYS:WMT), auto parts chains should be picking up business while the dealers starve, the "Rent-to-Own" businesses (Aarons, Rent-a-Center) will be busier than the Rooms-To-Go or the Ethan Allen(NYS:ETH) store.

The consumer will adapt and survive, but it's time for a real, comprehensive program that people can have confidence in.