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Retailers Expected to Post Weak Sales for September

Balmy temperatures meant a few more weeks of summer fun in the Northeast and Midwest, but the warm weather likely put a chill on retail sales, especially for fall apparel such as sweaters and fleece jackets.

Retail industry analysts are expecting to see widespread weakness when chain stores report monthly same-store sales on Thursday.

Holiday Shopper at Walmart
Ed Betz
Holiday Shopper at Walmart

And with larger-than-expected inventories of seasonal merchandise clogging store shelves, retailers are starting to discount merchandise aggressively.

This is a bad omen heading into the all-important holiday season. Analysts say it may indicate that there will be deeper discounts and thinner profit margins this year.

Weak September sales also could hurt third-quarter earnings in the sector. About 40% of third-quarter sales are rung up in September, making it the largest and most important month of the period, according to Bear Stearns analyst Christine Augustine.

"Going to Be A Debacle"

“I think (Thursday) is going to be a debacle,” said Charles Grom, an analyst at JP Morgan.

The news could be particularly bad for department stores, he said.

“September is a month that the weather does matter,” Grom explained. “So I think we’re going to see weakness across the board. We’ve seen Target, we’ve seen Family Dollar, negatively preannounce. So, I’m not expecting anything great tomorrow.”

Retailers are facing tough comparisons with strong growth last September. Department stores, in particular, are up against some particularly strong earnings in the year-ago period, when same-store sales in the sector rose about 8.9% overall.

In addition to the warmer temperatures, retailers also still have to contend with higher gas prices and a weak housing market. Gas prices reversed their downward trend in September, and actually rose 17%, on average, in September, Augustine said, in a research note.

Mall Traffic Slowed

“Higher gas prices likely drove fewer mall visits, while warmer weather likely hindered demand of fall apparel,” Citigroup analyst Kimberly Greenberger said. She estimates mall traffic fell 3% in September.

The analyst said she is most cautious on retailers with high levels of wintry apparel given the warmer temperatures that dominated the most of the country. These retailers include J. Crew Group, with its focus on sweaters and outerwear; Children’s Place, with its focus on coats; and Pacific Sunwear, with its high levels of fleece.

Same Store Sales Winners & Losers

Top 5
2007 Estimates
Saks 9.3%
Zumiez 6.6%
Walgreen 5.8%
JW Nordstrom 5.0%
CVS 5.0%
Bottom 5
Sharper Image -13.0%
Mother's Work -8.5.0%
Wet Seal -8.1%
Chico's FAS -7.5.0%
Gap -4.7.0%
source: Thomson Financial

Conversely, Abercrombie & Fitch, which had a large selection of transitional fall apparel may have fared better, Greenberger said.

Sales also should continue to hold up on the high end. In fact, Thomson Financial retail analyst Jharonne Martis expects both Saks andJ.W. Nordstromto post the biggest same-store sales gains in September on a percentage basis. Sales at stores open at least 12 months are expected to rise 9.3% at Saks, while Nordstrom should see a 5.0% gain in its September same-store sales.

Discounters to Post Largest Gain

However, as a retail segment, discounters should post the largest percentage gain, according to Thomson estimates, which forecast the group’s same-store sales up 2.3%. That number is an even stronger 3.4% gain, excluding Wal-Mart Stores.

Wal-Mart, the world’s largest retailer, is expected to report weaker growth than the 6.3% gain it recorded a year ago. The company’s forecast calls for an increase of 1% to 3%.

September Same-Store Sales

Sector
September 2007 Estimate
September 2006 Actual
Discount Retailers 2.3% 2.3%
Department Stores 0.0% 8.8%
Apparel -1.4% 6.3%
Teen Apparel -0.5% 10.9%
Specialty - 7.3% 1.1%
Drug 4.9% 7.6%
source: Thomson Financial

A report from SpendingPulse, a retail data service of MasterCard Advisors, which uses its data on sales activity in the MasterCard payments network, plus estimates of other payment forms to estimate monthly retail activity, seems to support these trends.

According to SpendingPulse, clothing and shoe sales were weak last month. Their study estimates clothing sales fell 1% in September, while shoe sales declined 1.7%.

High-End Remains Strong

Again, sales of luxury goods were resilient. According to SpendingPulse, sales of high-end jewelry, apparel and leather goods as well as sales at expensive restaurants rose 3.2% in September.

Teen retailers also may buck the trend, perhaps benefiting from a second wave of back-to-school shopping after teens returned to classes and checked out what their friends were wearing.

“We remain convinced that teens will continue to spend in the second half of 2007 as a result of must-have fashion items in key categories such as dresses, knit tops and denim,” said Christine Chen, an analyst at Needham.

Another wildcard could be if retailers were able to reap the benefits of stepped up marketing and promotional efforts, news around brand launches and new products.

For example, Macy’snot only stepped up its promotions in September, but it also unveiled its new line of Martha Stewart home products. Kohl’sintroduced the Simply Vera clothing line from designer Vera Wang, and Food Network-branded kitchen products.

The latest round of sales reports will likely weigh heavily on those attempting to gauge the health of the economy.

After a round of disappointing reports in July, retailers bounced back and turned in surprisingly strong sales in August fueled by a late burst of back-to-school shopping. That painted a picture of a still-healthy consumer, but broad-based weakness in September could reignite concerns about a slowdown in consumer spending.

“We have been expecting that we would be seeing greater signs of weakness as we push into the fourth quarter,” said Frank Badillo, a senior economist at Retail Forward KnowledgeBase.

Badillo predicts that by the holiday even the up-market consumers will begin to show signs of slower spending and retailers will react by putting greater emphasis on price cutting.

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