Retailers cut forecasts as December discounts hurt profits

Bloomberg NewsJanuary 9, 2014 

— Retailers of all stripes – from home-goods merchant Pier One Imports to discounter Family Dollar Stores Inc. and luxury lingerie seller L Brands – 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 Thursday cut profit forecasts after reporting disappointing December sales as promotions that failed to lure shoppers hurt profit margins. Pier One cut its fourth-quarter forecast after December sales trailed its expectations.

The early results are showing that the discounts – as steep as 75 percent off at luxury department-store chain Neiman Marcus Group – 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 0.7 percent, compared with a 0.2 percent drop for the broader 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.”

L Brands said in a statement Thursday 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 Thursday.

Family Dollar, based in Matthews, 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.

Family Dollar fell 2 percent to close at $64.97 on Thursday.

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.”

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

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.

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