Quarterly sales analysis: Q4 performance and industry outlook
A stretched out holiday season and positive economic data inspire optimism
CONSUMER PRODUCTS INSIGHTS |
The retail sector emerged from the holiday season with a more positive outlook than in recent years, with many posting modest gains amid an improving economy. Retailers benefited from increased and earlier promotions, but also leveraged more conservative estimates in addition to better planning and expense management. Director of retail and consumer products advisory services, former industry analyst Jeffrey B. Edelman, discusses recent positive and negative trends and how retailers can take advantage of the calendar and more consumer disposable income in the upcoming quarter.
Christmas in October: Thanksgiving promotions started earlier than in recent years, some after Halloween, as retailers looked to drive market share. Less thought was given to the resultant costs of longer store openings and increased promotions, as those were expected to be offset by incremental volume. Comparisons with last year were easy and there was the benefit of an extra day between Thanksgiving and Christmas. Therefore, holiday sales were better than they were in the last several years, but that is hardly saying much. Estimates show an increase of around 4 percent, although these are based on traffic counters and surveys rather than actual results.
Comparable store sales for most were flat to up 2 percent, including the benefit of online volume. It has become increasingly difficult to separate store sales from Internet purchases, as some represent replacement sales. Additionally, store-level sales are deflated by online purchase returns. The net result is often positive, as that customer trip generally translates into a higher transaction value.
Promotions drove early traffic; the most successful retailers were those with strong and transparent e-commerce capabilities. Importantly, inventories appeared to be in good shape after Christmas. Many public retailers provided very conservative sales and profit guidance, so even the most disappointing numbers were ahead of expectations.
However, January ended on a weak note. This could have been because of inclement weather around the country or perhaps due to less inventory needing to be cleared than last year. February was off to a similar start, which is somewhat perplexing since most economic data was encouraging and lower gas prices enhanced disposable income.
There were some upside surprises: Wal-Mart reported its first comparable store sales increase in two years, as its lower-income customer base benefited from lower gas prices. Kohl's also benefited from higher store traffic and improved merchandising. Nordstrom's department store sales gained momentum and were up slightly compared with its declines earlier in the year. Its off-price store sales were also stronger, up around 3 percent along with the Marmaxx group of TJX.
Some trends likely to carry through: The disappointments carried through to a number of brands that, up to this point, had weathered the storm fairly well. For example, Ralph Lauren experienced lower sales at both its regular priced and outlet stores. The latter is particularly surprising, as it was a venue where most strong brands have been doing well. Additionally, an abundance of Polo merchandise appeared to be at TJX and with extended markdowns in department stores.
Was the problem the product, too much sameness or just too much of it? We are not looking to single out the company for its performance, but it is symptomatic of the environment. It wasn't all bad news, as a number of bright spots emerged in the newer, higher end, more differentiated lines, but they are not sufficient enough to raise overall expectations in the near term.
The accessories sector was also slower than past quarters, but still better than average; there was some upside to conservative guidance. For example, Michael Kors experienced a slowing in its momentum; nevertheless, it posted one of the better increases. As a general rule, companies that are expanding their store base rapidly tend to post better comparable store sales gains because of store maturation. Those stores generally post strong sales increases during the first few years of operation, but overall results generally weaken as expansion slows.
It is interesting to note that many companies raised guidance and reported some upside to expectations because of being conservative at the outset and implementing tighter management of controllable expenses. Additionally, many retailers did a better job of planning for promotional events with their suppliers. Macy's, as an example, appears to have been most aggressive this year; however, a large portion of its offerings was its private brands. We should note its merchandise margin was better than expected and has been relatively stable in recent years due to effective planning and probability of higher vendor markdown allowances.
Sales across all channels followed patterns of preceding quarters, with the exception of the previously mentioned slowing in the factory outlet channel. The differences were largely due to strong or weak comparisons the last year. Remerchandising was a factor in helping results for stores such as Kohl's and JCPenney against a poor performance last year.
The residual impact of the dock strike: The dock strike is settled; however, it could have a noticeable impact on the flow of new merchandise or products that complete store sets, suggesting the likelihood of disappointments rather than upside surprises in sales. For those that were successful in bypassing the West Coast distribution hubs, higher transportation costs could cut into profits. The real question is what will the potential impact of markdowns be on seasonal fashion merchandise? Macy's indicated approximately 12 percent of its Q1 inventory has been delayed. Industry sources note it could take six to eight weeks to clear merchandise from the ships and docks.
Brighter prospects for Q1: Economic headwinds appear to be easing, as employment, the key driver behind consumer spending, is continuing its pace of gradual improvement, albeit at a slower than historic pace. Last year, the calendar worked against retailers due to the later Easter (April 20), and most stores experienced weak traffic early in the quarter. However, they also benefited from improving traffic and sales trends in April and into mid-May. This year, Easter is April 5, which should pull more sales into March, generating above-trend results. Unfortunately, there will be some give back in April.
Comparable store sales should remain slightly positive, aided by the inclusion of e-commerce volume. Weather always has an impact during this seasonally small quarter, a key influencing factor in the purchase of spring merchandise. The one problem most retailers are wrestling with is the fact that consumer spending has trailed personal income growth, which has benefited from much lower gas prices; however, that growth should have a more favorable impact ahead.
Obviously, savings rates are higher, so what will encourage the consumer to increase spending? If merchants are conservative with inventory and fashion assortment, there might be a less than compelling draw. Promotional activity alone will not be the answer.
Importantly, sales comparisons over the next several quarters will be against poor results last year, potentially looking stronger. Nevertheless, the worst has probably past.
Jeffrey B. Edelman is director of retail and consumer products advisory services for RSM, and is located in the firm's New York office. He routinely advises senior management of companies operating in the consumer and retail sectors on strategic, sourcing, financial, marketing and distribution issues. He also works closely with internal teams on matters such as new business development, transactional advisory, including due diligence and tax. Jeff can be reached at 212.372.1225, or via email at email@example.com.