Retailers Face an Ominous Holiday Sign

Sales of women’s clothing, a traditional pillar of the holiday shopping season, are unusually bleak so far this year, according to a major credit card company, an ominous sign for the retail industry. Add to Portfolio Mastercard International Inc Go to your Portfolio » Readers' Comments Readers shared their thoughts on this article. Read All Comments (31) » From high-end dresses to bargain coats, spending on women’s apparel dropped nearly 6 percent during the first half of the Christmas season, compared with the same period last year, according to MasterCard Advisors, a division of the credit card company. Analysts blamed a rough economy, which has discouraged women — and mothers, in particular — from splurging on clothing for themselves and a lack of compelling fashions this winter. The drop-off, which the credit card company described Sunday as “surprising,” bodes poorly for chains like Chico’s FAS and Ann Taylor, which specialize in women’s clothing, and could result in steeper-than-expected discounts on their merchandise in the final week before Christmas. The slowdown is worrisome because women make the vast majority of purchases in retailing, and their spending is a closely watched barometer of the industry’s health. In contrast, sales of men’s clothing rose 4.5 percent during the first 20 days of the season, MasterCard Advisors said. The credit card company issued on Sunday a midseason snapshot of the crucial holiday season, compiled between Nov. 23, known as Black Friday, and Dec. 12. The numbers in its SpendingPulse report are based on the purchases of its more than 300 million American cardholders and estimates of broader consumer spending through cash and checks. In its survey, MasterCard, which like many in the retail industry closely monitors sales trends, found that online spending had surged about 30 percent, well above the average growth this year. “If there is a star this year, it’s e-commerce,” said Michael McNamara, vice president for research and analysis at MasterCard Advisors. Spending on luxury items is up 10.8 percent, “which isn’t bad at all,” Mr. McNamara said. Purchases of electronics rose a healthy 5.8 percent. Over all, holiday spending is expected to grow just 4 percent this year, the slowest growth rate in five years, according to the National Retail Federation, a trade group. MasterCard estimates that roughly 60 percent of holiday purchases, or about $285 billion, have already been made. Sales of women’s apparel have struggled throughout much of the year, but retailers and manufacturers had held out hope for a holiday season revival. For a while, it seemed possible. Sales rose 10 percent on Black Friday, but trailed off soon after. Even high-end women’s apparel companies like Coach have warned of a slowdown because of higher energy costs, a tight credit market and slipping home prices. John D. Morris, senior retail analyst at Wachovia Securities, said that with less money to spend on gifts for their families, mothers “pull back on spending for themselves first.” Mr. Morris said the problem was compounded by lackluster merchandise in the mall. Little has stood out so far this season, with chains relying heavily, for example, on that winter staple, the chunky sweater. “There is a lot of sameness” in stores, Mr. Morris said. Analysts expressed surprise at the enduring strength of online spending, the growth of which was expected to begin tapering off after years of steep increases. One explanation may be the growing number of discounts and promotions this year. Dozens of online retailers offered free shipping and buy-one-get-one discounts on the Monday after Thanksgiving. With energy prices high, consumers are also turning to the Web to avoid costly trips to the mall. The SpendingPulse report from MasterCard found that Americans pumped 1.2 percent less gas during the first half of the holiday season than they did during the same period in 2006.

Poor December at Retailers; Most Report Drops in Sales

The weakest holiday shopping season in five years ended dismally for most retailers, whose sales tumbled despite deep discounts and extended store hours, stoking fears that the economy is tipping into a recession. Sales fell across the board, knocking down once seemingly invincible chains like Target (down 5 percent compared with last year); Abercrombie & Fitch (2 percent); Nordstrom (4 percent); and Kohl’s (11.4 percent). “It shows that the U.S. economy absolutely tanked in December,” said Ellen Zentner, United States macroeconomist at Bank of Tokyo-Mitsubishi in New York. “Consumer spending drives the economy. What we’re left with is no evidence of any kind of consumer momentum going into 2008.” But one major chain was spared: Wal-Mart, whose relentless price slashing appeared to resonate with penny-pinching shoppers. Its sales rose 2.7 percent. Wal-Mart’s lopsided victory — and the strength of off-price chains like TJ Maxx and Ross Dress for Less — suggested that jittery consumers, trying to cut back on spending, favored bargain chains over full-price stores during the 2007 holiday season. That is a reversal from years of trading up, when consumers flush with cash reached for more expensive products at higher-end stores. “Trading down became contagious,” said John D. Morris, senior retail analyst at Wachovia Securities. Even Saks Fifth Avenue observed the trend, saying its well-heeled consumers were holding out for discounts. Over all, sales growth in December was the weakest in seven years, according to the International Council of Shopping Centers, a trade group that averages sales from 45 big chains. It found that same-store sales — sales at stores open at least a year — rose a meager 0.9 percent, aided by Wal-Mart, which lifted the entire retail index because of its size. Averaging sales in November and December, it said, the 2007 holiday season produced the slowest growth rate since 2002. Same-store sales are a crucial yardstick in retailing, because they exclude business at new and closed stores, which tend to distort a chain’s performance. In the aftermath of the dreary results, a raft of chains, like J. C. Penney, Kohl’s and American Eagle Outfitters, cut earnings forecasts for the final three months of the year. Shares of Wal-Mart rose on its news, gaining $1.50, or 3.2 percent, to close at $48.40. The market reaction was mixed for other retailers, as some had already warned of lackluster holiday results. Shares of Gap fell more than 7 percent, while American Eagle’s shares gained just as much. With higher energy costs and sagging home values pinching consumer spending, retail analysts had predicted a rocky December. Adding to the stores’ troubles, this year’s earlier Thanksgiving shifted an extra week of shopping into November, making December look weaker for many stores compared with the previous year. But even with those factors, the size of the sales declines at many chains surprised analysts. Same-store sales fell 8 percent at Limited Brands; 7.5 percent at J. C. Penney; and 6 percent at Gap. “Consumers clearly tightened purse strings this holiday season,” said Ken Perkins, the president of Retail Metrics, a research firm. Clothing sales were especially hard hit in December. MasterCard Advisors, a division of the credit card company, estimated that women’s apparel, by far the biggest category, fell by 3.8 percent from last year, dragging down business at department store and specialty apparel chains at malls. By contrast, sales of electronics rose 2.2 percent, suggesting that products like digital picture frames and satellite navigation systems emerged as the must-have gifts for the holidays. That was reflected in a strong performance from Best Buy, which said sales rose 6.7 percent in the third quarter. Because of the calendar shift, stores encouraged investors to look at the average sales for November and December combined. But even by that analysis, the holiday season was weak for most chains. Macy’s, for example, said sales fell 7.9 percent in December and 1.1 percent for November and December combined. “After a strong November, we had hoped that a more positive sales trend would continue through December,” said the chief executive of Macy’s, Terry J. Lundgren. But a tough economy, “led customers to spend cautiously for the holiday,” he said. The most closely watched drama was Wal-Mart vs. Target. For much of the last five years, Target had trounced Wal-Mart, in percentage terms, in holiday sales performance. But not this time. Target said that even with the calendar shift factored in, sales rose just 0.6 percent, an unusually low number for it, especially compared with Wal-Mart’s 2.7 percent increase, a figure that includes sales at Sam’s Club. Target’s chief executive, Robert Ulrich, said earnings for the last three months of the year would probably fall from last year’s level. Wal-Mart was not the only success story, though. Costco, the wholesale club chain, said sales rose 7 percent, with higher gasoline prices bolstering its results. Costco, like many club stores, sells gas to members. Excluding gas, its sales rose 4 percent. Analysts said the chain benefited from shoppers buying in bulk to save money. Specialty clothing stores struggled all month. Sales fell 9.4 percent at Ann Taylor; 6.2 percent at Hot Topic; and 2 percent at American Eagle Outfitters. Abercrombie & Fitch was dragged down by the performance of its Ruehl chain, intended for 20-something clothing shoppers. Sales fell 22 percent in December, compared with a decline of 1 percent for the company’s brand, geared toward teenagers. Peter S. Goodman contributed reporting.

Big Retailers Scaling Back Expansion Plans and Shutting Stores

Home Depot, the nation’s largest home improvement chain, said on Thursday that it would abandon plans to open 50 new stores and would close 15 poorly performing locations. As part of the belt-tightening, the company will permanently scale back plans for expansion after 2008, when it will open new stores at the slowest rate in its 30-year history. Home Depot has been hit especially hard by the housing slowdown, but it is not alone in rethinking its expansion plans. Over the last six months, chains like Starbucks, Pacific Sunwear and Ann Taylor have vowed to close a combined 1,000 stores, which is expected to remake hundreds of shopping centers around the country. Bill Dreher, a retail analyst at Deutsche Bank Securities, said chains made overly ambitious plans for new stores “during a period when consumer spending was unusually robust.” “But it’s increasingly clear that those expectations were inflated,” he said. So like their customers, the stores are slashing their budgets during the economic downturn. Foot Locker will close 140 stores over the next year, Ann Taylor will start to shutter 117, and the jeweler Zales will close 100. Charming Shoppes, which owns the women’s clothing retailers Lane Bryant and Fashion Bug, is closing at least 150 stores. Wilsons the Leather Experts will close 158. Pacific Sunwear is shutting a 153-store chain called Demo. Even Starbucks is struggling and plans to close 100 stores. The International Council of Shopping Centers, a trade group, predicts 5,770 store closings in 2008, an increase of 25 percent from 2007. Many retailers not shutting stores are scaling back plans for new ones. J. C. Penney, Kohl’s and Wal-Mart are slowing their expansion or delaying store openings. Penney’s said it would open 36 stores this year, not 50 as planned. Kohl’s, which had aimed to open 100 stores a year, will build just 75 in 2008. The store closings and delayed openings are expected to ripple through the economy, depriving many communities of sales tax revenue and eliminating work for commercial construction companies. Home Depot said that its new plans amounted to a major shift in its business model, one that emphasized improving sales within existing stores, rather than achieving growth by rapidly opening new ones. In 2007, Home Depot’s sales-floor space grew by 4.9 percent. In 2008, that figure will fall to 2.5 percent. After that, it will drop to just 1.5 percent, regardless of the health of the economy, the company said. The moves will save Home Depot $1 billion in store construction over the next three years, cost the chain more than $500 million in write-downs and could result in hundreds of job losses. Wall Street analysts applauded the new strategy, which gave a lift to Home Depot’s stock. It rose 4 percent, to $29.87, on Thursday. David A. Schick, an analyst at Stifel Nicolaus, said investors were pleading with companies like Home Depot, Wal-Mart and Starbucks to focus on the stores they already have. “The ’80s and ’90s was growth, growth, growth,” he said. “But the stock market wants these stores to slow down.” Home Depot said that even though the downturn in the housing market had hurt its business, the new strategy was not a short-term response to the state of the economy. It will still open the 55 stores it planned for 2008. But Home Depot will not build 50 stores it has had in the works for up to 10 years. Store closings will take place in cities ranging from Saddle Brook, N.J., to East Fort Wayne, Ind. The closing stores make up less than 1 percent of its 2,200 locations. “Closing a store is always a difficult decision because it affects both our people and our communities,” said the chief executive of Home Depot, Frank Blake. “But, as with our decision to slow future store growth, this is the right decision.” Home Depot’s less ambitious plans for growth follow Wal-Mart’s decision last year to begin slowing its expansion after years of blanketing the country with its cavernous stores. The new strategies are an admission that some parts of the country are saturated with so-called big-box stores like Wal-Mart and Home Depot, the nation’s two biggest retailers. “It’s no secret that America is over-stored,” said Mr. Dreher, the analyst.