Retailers cut forecasts as December discounts hurt profits

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Courtesy of the Associated Press

(c) 2014, Bloomberg News.

NEW YORK — Retailers of all stripes — from home-goods merchant Pier One Imports to discounter Family Dollar Stores Inc. and luxury lingerie seller L Brands — are providing hard evidence that the discount war that marked the holiday season will take a toll on profit.

L Brands, which owns the Victoria's Secret and Bath & Body Works brands, and Family Dollar Thursday cut profit forecasts after reporting disappointing December sales as promotions that failed to lure shoppers hurt profit margins. Pier One cut its fourth- quarter forecast after December sales trailed its expectations.

The early results are showing that the discounts — as steep as 75 percent off at luxury department-store chain Neiman Marcus Group — didn't generate sufficient traffic or spur enough purchases of full-priced merchandise to make up for the lost revenue. The reports also pressured retail shares, with the Standard & Poor's 500 Retailing Index falling 0.7 percent, compared with a 0.2 percent drop for the broader S&P 500.

"This was the most promotional holiday season in five years, it's just not enticing the consumer," Anna Andreeva, a New York-based analyst at Oppenheimer & Co. Inc., said in a phone interview. "There's certainly no newness. The consumer's just postponing purchasing altogether."

L Brands said in a statement Thursday that it reduced its forecast because merchandise margins were lower than expected amid promotions. Fourth-quarter profit will be about $1.60 a share, down from a previous forecast of at least $1.67 a share. Analysts projected $1.79, on average. Sales at stores open at least a year at the retailer's Victoria's Secret brand rose 3 percent in December, trailing analysts' 4.4 percent average of estimates compiled by Retail Metrics Inc.

Same-store sales at Family Dollar decreased about 3 percent in December, "driven primarily by a decline in customer transactions," according to a statement Thursday.

Family Dollar, based in Matthews, N.C., said full-year earnings will be as much as $3.55 a share, reduced from a maximum of $4.15. The average of analysts' estimates was $3.98 a share. Comparable sales in the last quarter fell 2.8 percent, more than the low single-digit range that it previously expected. Analysts had projected a drop of 1.9 percent.

Pier One, based in Fort Worth, Texas, said profit per share in the quarter through February would be 47 cents to 52 cents, down from a previous forecast for profit of at least 60 cents a share. Analysts estimated 61 cents, on average.

Family Dollar fell 7 percent to $61.64 at 10:50 a.m. in New York. L Brands, based in Columbus, Ohio, slipped 4.8 percent to $57.32. Pier 1 slumped 13 percent to $20.36.

Retailers offering such large promotions risk training their customers to only shop when they see a big discount, said Paula Rosenblum, a Miami-based managing partner at Retail Systems Research.

"The challenge for retailers now is they've created a trend and now they have to find a way out of it," Rosenblum said in a phone interview. "That's going to be a big conversation in boardrooms soon — can we scale them back."

One company bucking the trend is Macy's Inc., which Wednesday forecast earnings for its next fiscal year that was higher than analysts' estimated. Profit per share in the year through January 2015 will be $4.40 to $4.50, the Cincinnati- based company said in a statement. Analysts projected $4.36.

Chief Executive Officer Terry Lundgren has kept profit growing by adding competitively priced exclusive merchandise and letting lower-level managers tailor assortments to local tastes. He's also increased online sales by fulfilling Web orders from store inventory.

U.S. retail sales rose 2.7 percent in November and December, the smallest increase since 2009, Chicago-based researcher ShopperTrak said Wednesday.

Same-store sales for the more than 10 retailers tracked by Swampscott, Mass.-based Retail Metrics rose 3.6 percent in December from a year earlier, exceeding the average estimate of analysts' for a 2.6 percent gain. This excludes results from Gap Inc., the largest U.S. specialty retail chain, which will report December sales after the close of trading.

Customer traffic in November and December declined 15 percent from the same period a year earlier, ShopperTrak said in a statement. Consumers spent $265.9 billion, resulting in a larger sales gain than the 2.4 percent increase ShopperTrak had predicted. Holiday sales have risen at least 3 percent every year since declining 1.2 percent in 2009.

U.S. retail sales rose 3.5 percent during November and December this year, led by children's apparel and jewelry, MasterCard Advisors SpendingPulse said. The National Retail Federation reiterated on Dec. 12 its prediction that total sales will rise 3.9 percent in November and December, more than the 3.5 percent gain a year ago.

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