Retail Outlook: Department Stores Big Winners For Holidays

After being out of vogue for years, department stores are making a big comeback this holiday season.

Industry consolidation, along with efforts to weed out poor-selling brands and underperforming stores, has rejuvenated the sector. Now the likes of Macy's and Nordstrom are luring shoppers with luxury brands and sharper marketing.

“The better department stores will continue to do well, simply because consumers have a love for everything luxury,” says Jason Asaeda, a retail analyst at Standard & Poor’s.

Same-store sales rose a strong 4% at department stores in November, with the best performances coming from Federated Department Stores , which owns Bloomingdale’s and Macy’s. Federated’s sales rose 8.5%, while Saks increased 7.2%.

“Federated should continue to see strength driven by their new advertising campaign and better merchandising while Saks’ new strategic change and strength in luxury should drive traffic,” says Stacy Turnof, a retail analyst at Merrill Lynch, in a research note.

Grabbing Market Share

The holiday season is still young--about half of all households haven’t even begun shopping. But sales patterns indicate that department stores might be grabbing market share from specialty apparel stores like Gap and Ann Taylor .

Overall, this is expected to be a solid holiday season for retailers, though not as strong as last year.

“Profits are likely to be good for a broad array of retailers," says Michael Niemira, chief economist at the International Council of Shopping Centers, a trade group based in New York. "However, the unevenness in sales that has been the backdrop for this year, and November as well, is likely to continue to dominate the retail environment. Department stores are the clear winners in 2006 and expected to be for the holiday season as well.”

The big exception, of course is Wal-Mart, which in November posted its first drop in monthly sales in nearly a decade. Not only that, the chain provided a weak outlook for December.

Excluding Wal-Mart, retailers posted a healthy 4.6% increase in same-store sales for November.

S&P's Asaeda expects the department store group to log mid-single digit gains in same-store sales for the November to January period.

The Weather Factor

As always, a lot will depend on the weather. After an unseasonably warm November, a visit from Jack Frost would help boost apparel sales. But December's weather is still expected to be warmer than last year.

“Should weather fail to support the season, then price promotion will kick in, favoring the promotional giants and certain specialty stores capable of driving enough volume to offset modest price reductions,” says Richard Hastings, senior retail analyst at Bernard Sands, a credit-rating agency. “The next two weeks have to trend colder for most of the country.”

So far, the consumer-electronics retailers have been the other big winners this year. Giants like Best Buy and Circuit City logged robust sales over the Thanksgiving weekend, as many consumers rose before dawn to snag discounted flat-panel TVs for less than $1,000 and other gadgets.

But don't expect to find any clues to holiday trends there because neither retailer discloses monthly same store sales.

Teen Retailers Strong

Teen retailers also staged an upbeat performance, notably American Eagle Outfitters . Specialty apparel sales rose a lackluster 1.3%, though Gap was a big drag on results; Guess and Limited were bright spots. Discounter’s sales were mixed: Wal-Mart and BJ’s Wholesale both posted poor performances, which were offset by strong results at rivals Target and Costco Wholesale .

“There are a lot of issues specific to Wal-Mart, but they are a barometer of the lower income consumer, and that consumer is now in recession,” says Hastings of Bernard Sands.

Investors will have to stay tuned.

"We expect both traffic and sales to peak late in the season when consumers should do the bulk of their holiday shopping this year," says Bill Martin, co-founder of ShopperTrak RCT, a research firm that monitors traffic at 45,000 retail outlets and malls.