Slow Sales Prompt More Drastic Discounts

Retailers are expected to increase discounting in the final days before Christmas after a late-buying binge failed to materialize during the last weekend before the holiday. And that's fueling worries that industry profits could be hurt in the fourth quarter.

"You will really see some dramatic desperation discounting" this week, said Burt Flickinger III, managing partner at Strategic Resource Group (search), a New York-based industry consultant. He estimated that profit margins will be cut by 3 percent to 5 percent in the fourth quarter as a result.

Merchants needed a hefty sales surge this past weekend to recoup lost business after seeing a slow start to a holiday selling season that never gathered steam. Now, they'll have to rely even more heavily on procrastinators during the final days before Christmas and post-holiday sales — expected to be boosted by the redemption of gift cards — to meet their holiday sales forecast. Gift cards are only recorded as sales when recipients redeem them.

ShopperTrak (search), which tracks sales at 30,000 retail outlets, reported on Monday that total sales fell 3.3 percent for Saturday and Sunday, compared with the same two days a year ago.

Jim Neal, a principal at Kurt Salmon Associates, also reduced on Monday his holiday sales forecast to the low end of his initial range of 3 percent to 3.5 percent. And he questioned whether "unplanned specials" will work. "Are consumers going to jump back in the car and get items that are on sale that are not on their list?" he asked.

Luxury stores — which have enjoyed robust sales as their well-heeled customers have benefited from the economy's recovery — had the best performance over the weekend, despite offering only selected discounts.

In contrast, mid-priced merchants like Sears, Roebuck and Co. (S) that cater to middle- and low-income shoppers — who have pulled back on spending as they have been more vulnerable to higher heating costs and a volatile job market — are being forced to keep trying to pull in customers with big discounts and expanded hours this week.

J.C. Penney Co. (JCP) will be opening at 7 a.m. from Wednesday through Friday, offering deals on jewelry and coats. Sears is offering discounts of between 40 to 60 percent on jewelry and 25 percent to 30 percent off of watches from Monday through Friday, according to Bill Masterson, a company spokesman.

Sears, Penney, AnnTaylor Stores Corp.(ANN), Gap Inc.'s (GPS) Old Navy and Limited Brands Inc's (LTD) Express stores were among the chains that discounted more heavily over the weekend than on the same Saturday a year ago, according to Margaret Mager, an analyst at Goldman Sachs.

Flickinger expects that stores this week will take additional discounts on heavy winter apparel like outerwear and sweaters, which have been hurt by seasonally warm weather.

Merchants also are trying to rope in customers with post-Christmas sales, mailing catalogs and issuing coupons for consumers at their stores. Over the past week, AnnTaylor has been handing out coupons, offering 20 percent on all merchandise, including sale items, from Dec. 26 through Jan. 3.

The Saturday before Christmas is traditionally the busiest day of the year for merchants, though last year the day after Thanksgiving stole that crown. However, the last weekend before Christmas could be losing its luster as there are more ways to shop for a holiday item.

The increased popularity in gift cards and online spending could be helping to skew the holiday sales figures.

The National Retail Federation is forecasting that consumers will spend $17.24 billion on gifts cards this holiday season, accounting for nearly 8 percent of the season's sales. Chicago-based General Growth Properties Inc., which operates or manages 220 malls across the country, reported that gift card sales should rise 20 to 25 percent this season from a year ago.

Online sales — which have been one of the bright spots of holiday shopping and are expected to hit the high end of forecasts — are not included in ShopperTrak's sales figures nor merchants' same-store monthly sales figures, which cover stores open at least a year.

Online sales, excluding business from travel and auctions, rose 49 percent from Dec. 13 to Dec. 17, compared to the corresponding days a year ago, according to comScore Networks Inc (search). With that sales surge near the end of the season, Dan Hess, senior vice president at comScore, expects online sales in November and December will be at the high end of its forecast of a 23 percent to 26 percent gain from the year-earlier period.

Online merchants also are enticing procrastinators to order gifts even closer to Dec. 25 with free shipping gimmicks, according to Heidi Messer, president and chief operating officer of LinkShare Corp., which tracks transactions on various coupon sites that are linked to larger merchants like Target Inc.

With a season that is two days longer than a year ago, the National Retail Federation (search) is holding on to hope that procrastinators will save the season. The trade organization estimates consumers on average have completed only 81.9 percent of his or her holiday shopping as of Dec. 19, based on a consumer survey conducted by BIGResearch from Dec. 17 through Dec. 19.

According to the International Council of Shopping Centers (search), the seven-day period ended Dec. 27 accounted for 20.6 percent of holiday sales in 2003, up from 19.6 percent in 2002.

The seven-day period ended Jan. 3 accounted for 14.1 percent in 2003, up from 12.8 percent in 2002.