Summary
The leading indicator used to determine the condition of the retail environment for stores like Saks Fifth Avenue, Macy's, Target, and Abercrombie & Fitch are same-store sales. This is a weak indicator at best in the current consumer climate. Markdowns and promotions are enormous going into November. Comps are holding up because stores are giving merchandise away. I believe that in general, the stronger the comps, the worse the margin, and the lower the earnings.
Analysis
Clearly this is THE WORST holiday selling season known to anyone alive at this point. It's definitely the weakest performance since the depression, and it feels to be about as bad as since the caveman!
Consumer aren't shopping unless the merchandise is cheap, cheap, cheap, and then discounted some more. I've heard of many deals on designer merchandise and other products that are well below the wholesale prices for retailers. Meanwhile, few people are talking about the likely margin ramifications at the expense of keeping same-store sales up.
Same-store sales at departments stores, which include Dillards, Macy's, JC Penney's, Kohl's, Neiman Marcus and Saks declined 12.2% in November. This declined appears to have stabilized from September and October sales, which declined 10.7% and 12.9% respectively. If we were able to look at markdowns during this same period however, it's likely we would be able to see that promotions increased roughly 10%, 25%, and 100% during the September, October and November period respectively. Gross margins on a typical retail business given this scenario could easily decrease more than 1200 basis points with vendor support.
Bottomline for investors of department stores and specialty chains, the better the comps, the worse the margins will likely be. High comps and high markdowns will clear inventory and position a retailer for growth when consumer confidence returns. But look for the fringes, too high the comp, too low the earnings; too low the comps, too heavy the inventory.
