Summary
The accounting for promotional versus clearance markdowns may be hiding a deeper and more pervasive impact on margin, and therefore earnings. Although far from comprehensive, a quick survey of post-Christmas clearance pricing tactics shows a much higher incidence of "promotional" offers than is usual. Promotional markdowns are booked when the product is sold, while clearance markdowns are booked at the time of the price adjustment. The anticipated super-deep post-Christmas pricing hasn't completely materialized, and one of the reasons may be an attempt to move markdowns from December into January. Sears in specific has used this approach in the past to artificially bolster earnings. Contrary to the article's conclusions, the real problem isn't consumer desire to avoid full retail. It's much worse than that.
Analysis
First, without deep insight into the actual booking practices at each retailer, it would be very wise to wait and see how January's numbers turn out before taking any position on future performance. With most retail fiscal years ending in January, it is very likely that a much more bleak picture will emerge. Retail executives can manipulate even the year end numbers to an enormous degree based on how they choose to value inventory at the end of January. It may be that it is best for a given retailer to "take the hit" in it's entirety now, clear the books, and get a clean start on fiscal 2009.....if they can afford to from a credit market perspective. Let's be clear: whether the markdowns are accounted for in 2008 or 2009 has no impact on any real operating dimension for a retailer. It only impacts how the retailer is perceived by the credit and equity markets. So this is a cautionary note: the current numbers may be inflated.
Symptomology in support of the "things are worse than reported" argument includes "bundling" in clearance pricing. Buy 1 at full price, get 2 for $.01. Or something similar. These aren't new.....they just aren't the most dominant form of clearance pricing. Solid, meaningful price points or percentage off signs have traditionally been much more effective....unless the bundling is clearly a significant value. At clearance time, the harder you make the consumer work to determine the real value, the less success you usually have. In addition, the drawback in bundling is that it seeks to motivate multiple purchases. While that may work on staple items, it's contrary to recession based consumer behavior, where shopping is "need" based as opposed to "opportunity".
The real question now is how bad January will be, and will those with better than average results continue the trend? Quickly, there is no reason to presume that WM or BJ's will suddenly turn negative (at least significantly). The Kohls performance was surprising, although probably driven by accumulated inventory generated by the previous three month comp declines and stimulated by aggressive and constant December promotions. Kohls has taken it's "real" markdowns, and the consumer will probably respond effectively. It's unlikely the December sales cleared out the inventory accumulated from Oct and Nov, so January should be relatively strong.....relative in that Kohls operates in a segment which should have routinely bad results. Target is benefiting from the flight from luxury retailers in December, but that dynamic shouldn't hold up in January. The "trade down" factor helps in hard goods, jewelry and home, but not particularly in apparel, where Target is 100% private label and not attractive to the high end department store bargain shopper.
Apparel chains including The Gap, J.Crew, Bebe and others should continue to struggle enormously in January and on into February. Without "must have" trends driving new product sales, and with existing merchandise already voted on as uninspiring, the sad truth is that clearance sales will be costly, slower than previous years, and mall traffic will continue to be down.
