The Wall Street Journal-20080206-Retailers Brace for Weak Results

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Retailers Brace for Weak Results

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Forget about gift-card use that pushed holiday sales into January or retailers' appetizing clearance sales. With consumers worried about their wallets, retailers may be about to report the industry's worst January sales numbers on record.

U.S. chain-store sales in January are expected to be flat and even decline from a year earlier, according to the International Council of Shopping Centers.

By either measure, that would be the worst reading, unadjusted for inflation, since 1969 when ICSC began to compile the data, according to ICSC's chief economist, Michael Niemira. ICSC already lowered the January forecast twice from an original estimate of a 1.5% gain during the month, Mr. Niemira said.

"It's an economic blizzard that seemed to be weakening demand," Mr. Niemira said. "The story of recession seemed to be in every daily newspaper. It just starts to increase the worry level. As the uncertainty got worse, the consumers' unwillingness to spend seemed to get worse."

Still, some retailers are expected to fare better than others even as retailers across the board are expected to be impacted by consumers faced with higher gasoline prices and food costs as well as declining housing and mortgage markets, analysts said.

Discounters, wholesale clubs and off-price retailers led each by Wal-Mart Stores Inc., Costco Wholesale Corp. and TJX Cos. should outperform as consumers sought bargains, they said. Luxury retailer Saks Inc. is also expected to be a winner in the high-end sector, shielded by its exposure to a more wealthy clientele still buying Chanels and Guccis, analysts predicted.

"Discounters always do the best when there's an economic slowdown," said Jharonne Martis, a retail analyst at Thomson Financial. "Consumers are more price-conscious. It's about savings, savings, savings."

Discounters are expected to post a 2.3% gain, according to the average estimate of analysts surveyed by Thomson Financial. Costco is projected to post a 6.3% gain; TJX a 3.8% increase; and Wal-Mart a 2% rise, according to analysts.

Most retailers report their January sales results tomorrow.

Companies in the apparel and department-store sector, after a weak holiday season that had left stores with excess coats and other merchandise, are expected to be the weakest performers because of deep discounts offered to clear stock, Ms. Martis said.

Gap Inc., the largest U.S. clothing chain, is expected to report a 7.4% decline in same-store sales, after having dropped in 11 of the past 12 months in 2007, Ms. Martis said.

The apparel sector, led by Gap, will register a 2.3% decline while department store segment sales may drop 3.6%, according to Thomson. Saks is the only company in the segment that is projected for a sales increase, at 3.5%, analysts estimated.

"Moderate department stores are likely to post the weakest results due to the discretionary nature of their assortments and their exposure to the home category, while the high-end is more insulated," Deborah Weinswig, a Citigroup analyst, wrote in a note to clients.

Even as January represents the smallest sales month of the year, retailers' outlook for the year still look less than rosy against the backdrop of economic concerns. The Federal Reserve last Wednesday lowered rates by half a percentage point to 3%, eight days after cutting rates by three-quarters of a point, to help the economy weather a period of weakness.

Last month, the National Retail Federation, called on President Bush and U.S. congressional leaders for swift action that would put money in consumers' pockets after U.S. retailers reported their slowest holiday sales since 2002. Legislation is moving through the House of Representatives and Senate to implement an economic stimulus quickly.

Retailer revenue this year is expected to rise 3.5%, its slowest advance in six years, according to NRF.

Sales are expected to slow in the first half of the year before picking up in the second half. Luxury and online retailers, which have outperformed in the industry, are also expected to exhibit slowing growth rates, NRF said. Many, retailers, including Home Depot Inc. and AnnTaylor Stores Corp., announced plans to cut staff to lower costs as they rein in expenses against sluggish sales.

"Everybody is focused on what's going to happen to the economy," said Saks's Chief Executive Stephen Sadove in an interview, referring to the most common theme that came up among his retail peers. The chief of the upscale retailer is nevertheless still optimistic about the luxury sector even though Saks also saw some slowdown in the entry-level luxury price point.

Wal-Mart projects January same-store sales to rise 2%. Wal-Mart beat analysts' estimates in both November and December after it lowered prices on more than 15,000 items during the holidays to spur buying.

The company's return to focus on low price especially in the midst of economic uncertainty has paid off, after a failed strategy in 2006 to attract upscale customers, analysts said. Wal-Mart said last week it is cutting prices by as much as 30% on thousands of items to lure Super Bowl-related purchases.

Wal-Mart's rival Target Corp., on the other hand, hasn't fared as well. Target said Jan. 21 sales for the month were tracking at the low end of its already reduced forecast range of a 1% decline to 1% increase after it suffered from a decline in traffic.

Target's shoppers, which generally have a higher income than Wal- Mart shoppers, are likely to be hurt more by a downturn in the financial markets that have led to layoffs in that sector, ICSC's Mr. Niemira said. Target's higher exposure to more discretionary items such as apparel also make it more vulnerable than Wal-Mart in an economic downturn, analysts said.

"Wal-Mart will continue to benefit from the difficult macro environment, as consumers trade down and consolidate shopping trips," Citigroup's Ms. Weinswig said. "Wal-Mart's increased and earlier promotional activity [versus last year] will likely have a positive impact on traffic and sales during the month. [Target's] sales remained challenging in light of the macro environment."