Discounts slam US retailers' holiday season profits

Many large U.S. retailers slashed their earnings forecasts because of steep discounts they offered during the holidays to persuade reluctant consumers.

The discounts boosted overall industry sales but hurt profits at many chains, including L Brands, Family Dollar Stores, and teen retailer Zumiez. Even retailers that reported big sales gains, like Kay Jewelers parent Signet Jewelers, were not spared.

Fewer store visits and aggressive pricing at the start of the season by big retailers like and Wal-Mart Stores left many chains with little choice but to offer sweeter deals. Many also had too much holiday merchandise, which was ordered in late spring when retail executives were feeling upbeat.

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A woman shops for jewellery at a Kohl's department store in Alhambra, California.
Federic J. Brown | AFP | Getty Images

"The discounts needed to be deeper, and they needed to be longer," said Joel Bines, managing director of consulting firm AlixPartners.

The discounts did result in a stronger-than-expected 2.7 percent increase in December sales at the eight retailers tracked by the Thomson Reuters Same-Store Sales Index.

Still, L Brands cut its holiday-quarter profit forecast on disappointing December sales at its Victoria Secret and La Senza chains.

While L Brands' sales at stores open at least year rose 2 percent last month, Wall Street had been expecting a gain of 3.7 percent, according to Thomson Reuters I/B/E/S. The company's shares fell more than 4 percent.

Zumiez reported an unexpected drop in same-store sales.

Shares of Signet, which is not part of the same-store sales index, were down more than 6 percent even though it reported a 5 percent increase in U.S. same-store sales for the November-December holiday season.

U.S. jeweler Tiffany & Co. reported a 6 percent jump in sales at stores open at least a year during the holiday shopping period, helped by strong demand in America.

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The company, famed for its blue boxes and its Fifth Avenue flagship store in Manhattan, maintained its full-year profit forecast, in contrast to other large retailers that have slashed their outlooks due to steep discounts.

Tiffany said net sales rose 8 percent in November and December, a period that can account for a third of annual sales and almost half of profit.

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Lower-end peer Zale Corp. reported a 2 percent rise in comparable-store sales for the same period, driven by higher sales at its Zales Jewelers and Zales Outlet stores. Zale's shares rose 17 percent to $16.53, while Tiffany's shares were slightly lower at $91.93 in early trading on the New York Stock Exchange.

Teen apparel retailer Abercrombie & Fitch raised its full-year earnings forecast, citing higher-than-expected sales in the fourth quarter to date and ongoing cost reduction efforts. Abercrombie shares rose 16 percent to $38.40 in extended trading.

The company said it now expects full-year adjusted earnings of $1.55-$1.65 per share, up from its previous forecast of $1.40-$1.50 per share.

Gap reported a lower-than-expected 1 percent increase in comparable sales, hurt by weak business at its Old Navy chain, but the retailer said it was "comfortable" its full-year profit would come in at the high end of its own forecast range. Shares rose 2 percent in after hours trading.

Sears Holdings', which is not in the same-store sales index, reported dismal holiday results at its namesake and KMart stores. Its shares tumbled after hours.

Toys R Us, also not in the index, said same-store sales were up 1.8 percent at its U.S. stores.

Deals, deals, and more deals

Between Nov. 3 and Jan. 4, eight retailers, including Wal-Mart Stores, Target, and Macy's, increased the number of circulars published by 6 percent and sent 57 percent more promotional emails, according to data prepared for Reuters by MarketTrack.

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Retailers also had to deal with shoppers who were less willing to go into stores: Data firm ShopperTrak this week said foot traffic had dropped 14.6 percent this holiday season.

Walgreen, whose comparable sales of general merchandise rose 2.5 percent in December, said fewer shoppers had come to its drugstores.

Small clothing chain Cato Corp. also slashed its profit forecast after reporting poor December sales.

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Still, some retailers offering staples at low prices fared well. Warehouse club chain Costco Wholesale reported a 5 percent gain in U.S. same-store sales for December, while Wall Street was expecting only 1 percent.

American Eagle Outfitters said comparable sales for November and December fell 7 percent and that it expected its quarterly profit to come in at the bottom of its earlier forecast range of 26 cents to 30 cents per share.

Family Dollar's same-store sales fell 3 percent last month. American Eagle and Family Dollar are not part of the same-store sales index.

At least three brokerages cut their price targets on specialty value retailer Five Below after the company cut its fourth-quarter forecast late on Thursday, blaming the weather for a fall in customer traffic. Footwear retailer Shoe Carnival shares also tumbled on a weak forecast.

By Reuters