Retailers Are Starting Off 2014 With Deeper Discounts

January 23, 2014

U.S. retailers are getting 2014 off to a heavily promotional start, building on last year's deep-discounting trends, according to Morgan Stanley Analyst Kimberly Greenberger.  The 26 retailers she covers are about 40% more promotional than they were during the same month last year, she wrote in a research note.  "Our data indicates not only are promotions more widespread this year, but also discounts are deeper."

The pain retailers felt at the end of 2013 isn't showing signs of relief in the new year.  Following the worst holiday season since 2008 - one that was underscored by dramatically reduced prices and lower margins - the heavily promotional environment has persisted into January.

"The 'Polar Vortex' likely hindered week one, but our mall visit indicated week two was only marginally better, despite temperatures essentially in-line with last year."

Of the 26 retailers that Greenberer tracks, only Urban Outfitters' Anthropologie was "unequivocally less promotional" than last January.  Abercrombie & Fitch and Gap's Banana Republic were among stores that had a higher percentage of inventory on promotion, as did Macy's, which outperformed most of the sector in the November to December period.

Management at Lululemon and Express made statements earlier this month that traffic in January has continued to be weak, with Express saying it expects to remain promotional during the month.  On Thursday, the women's clothing retailer offered shoppers 40 percent off every item, a deal that was prevalent in its pre-holiday rush.

Although January tends to be big on discounts, as retailers make room for spring products, news of heavier-than-typical promotions does not bode well for the sector, which saw its margins crushed by widespread, deep price cuts at the end of 2013.  Experts had warned that retailers needed to wean consumers off of these discounts in the new year to protect their profits. 

Mainly as a result of these discounts, Thomson Reuters said Tuesday that 74 retailers so far have trimmed earnings per share estimates for the fourth quarter, compared with only 15 who had positive things to say about the quarter.

Retail Metrics' Ken Perkins sent out his preliminary same-store sales estimates for January, saying he predicts comparable sales for the month will increase a tepid 2.7 percent, versus last January's 5.1 percent gain.

Among those expected to report on February 6, Perkins predicts Gap - which posted a relatively strong 1 percent comp in the November to December period - will post its first monthly decline since September.  Perennially strong L Brands - parent of Victoria's Secret - is also expected to follow up its disappointing holiday sales with a slight 0.8 percent gain in January.

"The coal looks to keep coming in January," Perkins said.

Source: SmartBrief, CNBC