Discounts Boost December Retail Sales But Hurt Profit Margins

The first round of December same-store sales reports suggests that shoppers were willing to spend if retailers’ prices were right.

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Limited Brands (NYSE:LTD) on Thursday reported better-than-expected December sales, which rose 7 percent at stores open more than a year, while teen clothing retailers Zumiez (NASDAQ:ZUMZ) and The Buckle (NYSE:BKE) beat forecasts with gains of 10 percent and 8.9 percent, respectively.

But Costco (NASDAQ:COST) fell short of Wall Street’s expectations with a 7 percent jump in same-store sales, while Wet Seal’s (NASDAQ:WTSLA) decline was sharper than expected, in part due to a 20 percent drop in online sales.

Conversely, Macy’s (NYSE:M) reported online sales climbed 35.8 percent in December, more in line with this season’s shopping trends, which saw more people avoiding long lines by making their purchases online.

However, though record holiday sales indicate more consumer enthusiasm, the key to keeping them coming now that the holidays are over will be to continue offering enticing deals like the store-wide 40 percent-off sale American Eagle (NYSE:AEO) kept going for most of December, which helped boost the retailer’s same-store sales by 12 percent last month.

With many Americans on tight budgets, and so many stores offering bargains in hopes of underselling their competitors, the revenue of retailers not offering deals will likely take a major hit.

Of course, retail sales are likely decline in January no matter what stores do to keep shoppers coming. The holiday season was mostly responsible for the huge increase in store traffic, as were expanded store hours that have, at many locations, returned to normal.

But all the same, many stores will continue to offer bargains in hopes of keeping up revenue, though profit will take a hit. J.C. Penney (NYSE:JCP) lowered its fourth-quarter profit forecast, citing “higher markdown” activity. Kohl’s (NYSE:KSS) lowered its holiday-quarter profit outlook after disappointing December sales. And while Target’s (NYSE:TGT) sales did rise, they missed expectations, forcing the company to lower its quarterly profit forecast as well.

Gap Inc. (NYSE:GPS), which owns Old Navy, Banana Republic, and Gap stores, was one of the biggest losers, with overall same-store sales down 4 percent in December. Retailers like TJX Companies (NYSE:TJX), which beat analysts’ expectations for same-store sales by a wide margin with an 8 percent gain, have had to price products “aggressively.”

All in all, sales for the 22 retailers tracked by the Thomson Reuters same-store sales index rose 3.4 percent in December. The National Retail Federation expects retail sales to be up 3.8 percent for the November-to-December holiday shopping period.

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