Early promotions, sluggish sales to take a toll on profits

In holidays past, mall retailers sought to outdo one another by creating elegant window displays designed to convey the warmth and magic of the season. This year, however, sluggish traffic and lackluster sales will force retailers to woo shoppers with all the subtlety of a carnival barker hawking tickets to a sideshow, says retailing veteran Stevan Buxbaum, executive vice president of Agoura Hills, Calif.-based Buxbaum Group, the consulting and turnaround investment firm.

"You could call this the 'Battle of the Signs,'" Buxbaum says. "Instead of the windows being done up like something out of 'Miracle on 34th Street,' they'll be done up like a liquidation sale. The signage will be intense and extreme, with messages like 'Buy 1 Get 1 Free' and 'Everything 25% Off!' "

Given the onslaught of gloomy economic news, Buxbaum says, it is little wonder both retailers and shoppers are now inclined to favor realism over sentiment. (Indeed, consumer confidence sank to an all-time low in October.) For shoppers, this will translate into a laser-like focus on saving money, as well as a clear-eyed understanding that some of their favorite retail chains likely will go under once the season is over.

"You can see this with the ongoing shift in attitudes about gift cards," Buxbaum says. "Millions of shoppers now are sending and receiving e-mails that warn people not to buy gift cards at a long list of bankrupt or ailing chains. There is growing recognition among shoppers that these chains may not be around much longer to honor the cards."

For retailers, on the other hand, the challenge amid these daunting dynamics will be to shout bargain-themed messages as loudly as possible. Some will choose to stock their stores with the cheapest goods in their inventories. This focus on value is all the more imperative because of this year's inauspicious retail calendar, Buxbaum adds.

"Thanksgiving is about as late as possible this year," he notes. "That means the all-important shopping period between Thanksgiving and Christmas -- a time when many retailers count on raking in most of their money -- is extremely short. Chains just can't afford to take a chance. In fact, we're already seeing a huge and early increase in promotional activity, and this will continue."

But these early promotions will come at a cost for some chains. American Eagle, for one, already has suffered steep drops in profitability as a result of its newfound emphasis on value-priced goods, Buxbaum says. "When promotional activity comes sooner, that lowers profit margins because chains must take deep discounts right away instead of just after Christmas," he explains. "If you combine the truncated calendar, expectations of dismal holiday sales and these early promotions, you have a formula for flat or negative same-store sales."

Value-focused national retailers like T.J. Maxx, Marshall's, Wal-Mart and Ross Dress for Less clearly stand a better chance than some of their competitors this season, Buxbaum notes. But a value-focused approach is less of an option for names like Abercrombie & Fitch, which has chosen to endure lower comp-store sales rather than risk the reputation of its upscale brand by going cheap, Buxbaum says.

Keeping inventories lean is a widespread strategy in such uncertain circumstances, but it also carries a risk for retailers, he notes. "The best and most desirable merchandise sells out faster when you strip inventories to the bone," he says. "By mid-December, many stores are going to be fairly broken in terms of what merchandise they have available. In past seasons, people would have just bought a gift card if they couldn't find the item they were looking for. This year, they'll think twice about that."

In the run up to the holiday season, the list of troubling economic indicators is dauntingly long. Some analysts may differ on whether dips in, say, consumer confidence always mean shoppers will close their wallets. For Buxbaum, though, other bellwethers clearly spell trouble for retail.

"What is telling is the lack of visits to malls -- traffic is down -- as well as declines in the total number of retail transactions taking place," Buxbaum says. "People have lost the feeling right now that shopping is a sport. They are finding other things to do with their time."

About Buxbaum Group
Buxbaum Group has built its reputation for over 30 years as one of the largest liquidators and appraisers of retail and wholesale inventories across North America. While continuing to operate in those areas, the company has shifted its primary focus in recent years to turnaround investing.

Source: Buxbaum Group
AGOURA HILLS, Calif., Nov. 26, 2008 /PRNewswire/ --