Updated March 30 at 12:29am

Stores pay price for holiday deals as profit forecasts slip


NEW YORK - Retailers are starting to pay the price for a discounting binge that was deeper and longer than ever -- especially stores that cater to middle-income shoppers.

Look no farther than American Eagle Outfitters Inc. The clothier’s promotions helped boost sales in the past two months by 15 percent to $887 million. The teen retailer was forced to reduce its fourth-quarter profit forecast Thursday.

Ditto for Target Corp., J.C. Penney Co. and Kohl’s Corp., which lowered their own fourth-quarter profit forecasts after pouring on the discounts.

“The retailers that cater to the middle class are struggling,” Alison Paul, retail sector leader at Deloitte Touche LLP in Chicago, said in an interview. “Some of them showed great volume numbers, but the proof is in the profit.”

Investors noticed. All four stocks sank yesterday in New York trading, with American Eagle dropping 11 percent for the biggest decline since May 26, 2010, and Target sliding the most in two months. American Eagle fell 0.2 percent to $13.49 at 9:34 a.m. today, while Target gained 0.1 percent to $48.59 and J.C. Penney rose 1 percent to $34.11. Kohl’s dropped 0.9 percent to $46.10.

Meanwhile, stores that cater to lower-income shoppers are getting a boost as middle-class consumers trade down.

Discounters Ross Stores Inc., which is based in Pleasanton, Calif., and Framingham, Mass.-based TJX Cos. snagged shoppers seeking discounts on apparel, home goods and accessories.

Ross Gains

Ross’s same-store sales gained 9 percent in December, surpassing the average estimate of 4 percent growth, according to Retail Metrics Inc., which is based in Swampscott, Mass. Sales at TJX increased 8 percent, beating the 2.4 percent estimate.

Americans are spending cautiously amid slow wage growth, limited job gains and depressed real estate values. U.S. service industries expanded less than forecast in December, indicating improvement in the economy will be uneven, according to the Tempe, Arizona-based Institute for Supply Management.

Personal spending climbed 0.1 percent last month, the Commerce Department reported Dec. 23. That was less than the median 0.3 percent gain projected by a survey of 79 Bloomberg economists.

One concern is the relatively paltry buying power of young adults, normally prodigious spenders in good times, said Pam Danziger, president at researcher Unity Marketing Inc.

“Middle-of-the-road retailers will continue to struggle to draw consumers in,” Danziger said. “They’re going to be hampered going forward because 20-and 30-somethings don’t have the money to spend.”

Profit Forecast

American Eagle’s fourth-quarter profit may top out at 35 cents a share, down from both last year’s result and a previous forecast of as much as 44 cents, the Pittsburgh-based company said Thursday in a statement.

While American Eagle reported that same-store sales gained 12 percent in November and December, the retailer’s “aggressive promotional stance” depressed margins, the company said in a statement.

“For some companies, the profit cut might be worth it because they gained new customers or market share,” said Marshal Cohen, chief industry analyst at NPD Group in Port Washington, N.Y. “But even this benefit is questionable because people just don’t have more money to spend right now.”

J.C. Penney Forecast

J.C. Penney, which is based in Plano, Texas, cut its profit forecast to as low as 65 cents, excluding some items, from a projection in November of $1.15. CEO Ron Johnson, who took over in November after running Apple Inc.’s retail operations, is reviewing pricing and products to rejuvenate sales.

Target, which used such ploys as an “almost last minute sale” on Dec. 8 and 50 percent off the day after Christmas, expects to now earn as little as $1.35 a share. The average estimate of 21 analysts surveyed by Bloomberg was $1.48. Comparable-store sales rose 1.6 percent last month at the Minneapolis-based chain, missing analysts’ projections for a gain of 3.3 percent.

Department store Kohl’s, based in Menomonee Falls, Wisconsin, cut its fourth-quarter profit forecast to as much as $1.73. Sales lagged as unseasonably warm weather led to sluggish sales in coats, gloves and jackets, Kevin Mansell, CEO, said in a statement.

Macy’s Inc. proved to be one of the few mid-tier retailers to do well as December sales beat estimates and it raised its profit forecast. The second-largest U.S. department store chain is skilled at stocking regional stores with appealing merchandise, said Michael Niemira, chief economist at the New York-based International Council of Shopping Centers.

Loyal Customers

“They’re the exception, because customers identify with Macy’s, and are still loyal in spite of the environment,” Niemira said in a telephone interview.

While several retailers that cater to the middle class had to draw shoppers with more discounting than expected, luxury chains continued to increase sales past estimates.

December sales at luxury department store chains Saks Inc. and Nordstrom Inc. beat estimates by researcher Retail Metrics. Sales at Saks, based in New York, gained 5.8 percent, compared with an estimate of 5.5 percent growth. Nordstrom sales were up 8.7 percent, surpassing the estimated 4.7 percent gain.

“Luxury consumers are the heavy lifters in the economy, so it makes sense that businesses like Nordstrom and Saks will benefit from their excess spending,” said Unity’s Danziger, who is based in Stevens, Pennsylvania.

Black Friday

For the rest of the industry, luring shoppers by almost any means was the norm. Consumers started seeing Black Friday deals just after Halloween, a month before the actual day. Several chains, including Kohl’s, opened at midnight on Thanksgiving for the first time.

When shopping events passed, a few chains repeated them. 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. These ploys are expected to help holiday sales in stores increase 3.8 percent, compared with a 5.2 percent advance last year, according to the Washington-based National Retail Federation.

“The middle class economy did not fall into place, and consequently, the middle-tier retailers didn’t either,” Niemira said. “On the surface sales were stronger, but then you ask the other questions and the picture isn’t great.”


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