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Have Retailers Reached Their Limits?

Retailers: are we reaching the limits of cost cutting? Cautious comments on fourth quarter sales from Saks and Target are weighing on retailers today.

Let's focus on Saks. Here's the bad news:

1) Year over year, comparable store sales declined 10.1 percent

2) SG&A (Selling, General & Administrative expenses, a key component of costs) was basically flat compared to last year.

In other words, for various reasons they appear to be reaching the limits of how much they can cut.

The lesson: you cannot cost cut your way to prosperity, at least not for very long. At some point, you need higher sales.

There was some good news on the third quarter for Saks:

1) better margins, because of fewer markdowns (among other things, there were fewer Friends & Family sales—and more people excluded from them!)

2) comparable store inventories declined 22.2 percent (!!)

Bulls on the high end retailers note that the high end seems to be recovering faster than the low end. The theory behind this is that:

1) wealth creation this year has been driven by asset appreciation, not employment. This helped wealthier people feel, well, a little wealthier.

2) more capacity came out of the high end.

But with a few exceptions (Nordstrom ) these remain theories that will be tested in the next month.

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