Retail

Here's what heavy discounts in September mean for retailers this holiday season

Key Points
  • Kohl's says the warmer temperatures stuck around longer than normal at the start of this fall season.
  • As a result, more retailers had to use discounts to move unsold products off shelves.
  • Kohl's CEO Michelle Gass expects the heightened promotional activity is here to stay.
A woman shops for jewellery at a Kohl's department store in Alhambra, California.
Frederic J. Brown | AFP | Getty Images

The sharp selloff of retail stocks Tuesday sends a powerful signal: Investors are worried the deep discounts that battered Kohl's latest earnings report will be repeated, as more retailers report in the coming days.

Kohl's said Tuesday the summer's warmer temperatures stuck around longer than normal this September. And so more retailers than it expected used discounts to move unsold products off shelves.

But it's not just the weather. Kohl's CEO Michelle Gass expects the heightened promotional activity is here to stay throughout the holiday season. That's ultimately what drove Kohl's to lower its full-year profit outlook.

"Weather clearly had a role," Gass told CNBC in an interview. "When you are in the business of selling sweaters and fleece," like Kohl's is, a delayed start to fall makes it tougher to sell some merchandise.

Other categories like home goods, however, also saw competitive pricing. And Kohl's responded by slashing prices — even if that weighed on profits.

"I think for us at Kohl's we stand for value," Gass told analysts during a post-earnings conference call. "So we must maintain and preserve this position. ... So given the landscape, and it is what it is and our guidance reflects that we expect that to continue into [the fourth quarter] — we're going to lean in and make the short-term investment in pricing and promotion as we need to — to make sure that we can capture these customers and importantly get them on our loyalty ladder for the long term."

By midday, Kohl's shares, which have a market value of $7.6 billion, were down more than 18%. Since the start of the year, the stock has fallen more than 28%.

Shares of rival department stores also fell. Macy's shares, which are valued at $4.7 billion, dropped 10%. The stock has fallen 49% since the start of the year. Nordstrom's stock fell 5%. Its shares are down nearly 23%, giving it a market value of $5.6 billion. J.C. Penney shares, which trade just above $1, were down about 1%.

Macy's and Nordstrom are both set to report quarterly earnings later in the week, which should offer a clearer picture of the promotional trend and consumer spending. Penney, which is trying to restructure its debt amid slowing sales, reported dismal results last Friday.

"There are still retailers that are doing well without having to drive promotionally," Jefferies analyst Randy Konik told CNBC. "We believe Target is taking some market share. ... It's not just the weather. I think the environment is more competitive."

Another way, besides discounting, that Kohl's is responding to the promotional activity is by launching more of its own brands, which offer better profit margins. "We have more coming," Gass said.

More seasonal temperatures helped make for a stronger October, Kohl's said. But other categories, such as home, remain pressured.

"[Companies] see home as a way to get new customers," Gass told CNBC. "We are not going to give up that market share. We are going to lean in and be more [price competitive]."

In a survey by Adobe Analytics of 403 U.S. retailers, from Oct. 23 to Oct. 29, the biggest "challenge" cited by companies for this holiday season was staying competitive on price, with 40% of respondents saying they are concerned about this. Seventy-five percent of retailers are planning to offer sales earlier this holiday season because of the shortened shopping calendar this year.

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Key Points
  • Kohl's third-quarter earnings and sales miss analysts' estimates.
  • The department store chain also trims its profit outlook for fiscal 2019.
  • After the report, the stock price tumbles.