Blue Christmas for Retailers as Slumping Economy Hammers Sales 

By Don Miller
Contributing Writer
Money Morning

Retail stores confirmed yesterday (Thursday) what most analysts had already suspected - the Grinch stole Christmas.

The huge discount programs big retailers devised to bolster sales failed to attract enough consumers to save the holiday season. 

Even bellwhether Wal-Mart Stores Inc. (WMT), which had managed to dodge the cold winds of recession over the past year, was clobbered by the economic meltdown.
The discount retailer missed big on its December same-store sales numbers.  And across the board, a chorus of large retailers chimed in with similar, disappointing news.

Altogether, it may add up to the worst holiday-shopping season in four decades, as rising unemployment and tightening credit forced consumers to the sidelines during the all-important fourth quarter.

Citing the impact of slower than expected sales at its Sam's Club warehouse stores and international units, the WalMart posted a 1.7% increase in same-store sales. The world's largest retailer also cut its fourth quarter earnings forecast.

"The current economy remains challenging for all businesses, and retailers have already seen customers pull back on discretionary spending," Tom Schoewe, Wal-Mart's finance chief told the Financial Times. "Consumers are very focused on value and necessities."

At first, consumers had crowded discount stores seeking lower-priced goods, but surprised investors must now cope with a retail environment where even Wal-Mart seems vulnerable.

"I am shocked and disappointed," retail analyst Britt Beemer, chairman of America's Research Group, told  Because of its low prices and aggressive discounts, Beemer had pegged Wal-Mart as the clear winner of the holiday shopping season and was expecting the retailer to post a 3% sales gain in December.

Overall, same-store retail sales dropped 1.7% in December, the International Council of Shopping Centers reported. Same-store sales measure sales at stores open for more than a year, and are considered to be an important indicator.  Sales declined 2.2% in the last two months of the year - the biggest such drop since the group started tracking the data in 1970. 

Damage was widespread and deep, pummeling not only discounters but high-end marketers. Same-store sales at luxury retailer Neiman Marcus Group Inc. sank 28% in December. Saks Inc. (SKS) posted a 20% sales decline, twice as large as analysts estimated, even after markdowns of as much as 70% on designer goods.

Macy's (M) said same-store sales fell 4% and it will close 11 underperforming stores in nine states, affecting 960 employees. The department store chain expects to earn between 90 cents and $1 per share for the quarter ending Jan. 31, below the consensus estimate of $1.12.

"This has been the most challenging economic environment in memory," Macy's CEO Terry Lundgren said in a statement.

Any sales rebound in the coming year will have to weather strong headwinds from surging unemployment.  Although initial unemployment claims fell last week, they are still up 42% over 2007, the Labor Department reported.  Continuing claims rose by 101,000 to 4.61 million in the week ending Dec. 27, the highest level since November 1982.

The Labor Department is set to release the December jobs report today (Friday). Economists had expected a loss of 500,000 jobs last month, but many are revising forecasts upwards.  A report from payroll processor ADP projected job losses of 693,000 as reported by Money Morning on Thursday, capping what could be the worst year of job losses since the end of World War II.

And in more bad news on the unemployment front, Walgreen Co. (WAG) the nation's No.2 drugstore chain said it is eliminating about 1,000 jobs, or about 9% or its work force.

"That does not bode well going into January-February, where we go into a lull period and there's really no reason to buy until spring," Adrienne Tennant, an analyst at Friedman, Billings, Ramsey & Co. (FBR) in Arlington, Virginia, told Bloomberg Television.

Even the good news was bad. J.C. Penney Co. (JCP) same-store sales fell 8.1%, better than it and analysts had estimated. Kohl's Corp.'s (KSS) dropped 1.4%, helped by last- minute shopping and "strong post-Christmas business." Analysts had anticipated a 5.9% decline.

But the lackluster results at most discounters were a huge, negative surprise.  Costco Wholesale (COST) reported a 4% drop in same-store sales for December, a bigger decline than the 3.7% analysts had expected.

Target's (TGT) December same-store sales fell by 4.1%. The retailer said this was in line with their expectations but that it had to slash prices to clear inventory.

"These markdowns, combined with additions to our accounts receivable allowance, will put additional pressure on our profitability in the fourth quarter," the company said.

"This kind of discounting is a big concern," Retail Metrics President Ken Perkins told Bloomberg TV. "January will be a heavy clearance month, with further downward margins pressure, and we might see more forecasts cut."

It's almost like Pavlov's dog," said Craig Johnson, president of retail-consulting firm Customer Growth Partners LLC in New Canaan, Connecticut.  "Consumers have become so accustomed to markdowns that nobody wants to pay full retail anymore."

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