Bloomberg News

Cyber Monday Comes Twice as Sears Bargains Crimp Margins: Retail

December 16, 2011

Dec. 9 (Bloomberg) -- Cyber Monday came twice this year at J.C. Penney Co. and Sears Holdings Corp. -- once on the day after Thanksgiving weekend and again a week later.

The proliferation of Cyber Mondays and related discounts is testament to the marketing maneuvers retailers are employing this year to keep consumers spending between now and Christmas.

Typically stores prune the deals after Thanksgiving. Less so this year. Amid 8.6 percent unemployment and concern Europe’s debt crisis could tip the U.S. back into recession, retailers are still pouring on the discounts. That may hammer margins, especially for retailers forced to deal with higher labor and raw material costs this year, said Poonam Goyal, a Bloomberg Industries analyst.

“Investors expected margins to be down due to inflation, but they didn’t expect margins to be down from more promotions,” said Goyal, who is based in Princeton, New Jersey. “The promotions don’t get deeper necessarily after Black Friday, and to see them at the same level is a bit alarming.”

Retailers are in the midst of the traditional spending lull between the Black Friday weekend and the final days before Christmas when shoppers often pull back. This year’s pause comes after retailers posted record Black Friday weekend sales of $52.4 billion, according to the National Retail Federation. Industrywide same-store sales in November also rose 3.2 percent, surpassing analysts’ projections.

To get those results, retailers began promoting for the holidays earlier than ever. “Black Friday” deals arrived a month before the actual day and marketing ploys like Black November and Black Friday week proved popular.

Better Deals

Some consumers have already blown through their holiday budgets. Others, trained to expect discounts and flashy marketing gambits, will wait for better deals before being tempted back to the mall, said David Bassuk, head of the global retail practice at consultant AlixPartners in New York.

“It is a crazy time right now with retailers willing to do anything,” Bassuk said. These antics make December’s results “highly questionable.”

Store traffic in the first week of December declined 5.9 percent from a year earlier, according to ShopperTrak. Traffic was steady during the same week in 2010, the Chicago-based firm said. If shoppers continue to pull back, retailers may be forced to cut prices more than expected, resulting in a margin squeeze, says Goyal.

That already began happening during the third quarter. The average gross margin, or the percentage of sales left after cost of goods sold, for 43 retail companies in the Standard & Poor’s 500 Index narrowed to 32.2 percent, from 33.1 percent a year earlier, according to data compiled by Bloomberg.

Vulnerable Chains

Apparel chains may be especially vulnerable because the clothes they are selling now were sourced earlier in the year when cotton prices were at record highs. Third-quarter gross margins declined more than 3 percentage points at Abercrombie & Fitch Co., Gap Inc., Urban Outfitters Inc. and Chico’s FAS Inc.

Unseasonable weather is a factor, too. November temperatures in North America were the fourth-warmest in the past 50 years, and so far December is balmier than a year ago, according to Berwyn, Pennsylvania-based Planalytics Inc.

That has forced retailers to mark down winter clothing -- potentially another hit to margins, said Ken Stumphauzer, a retail analyst for Sterne Agee & Leach Inc. in New York.

That is adding to the woes of mid-tier retailers such as Kohl’s Corp. and J.C. Penney, which both missed sales estimates in November, he said.

“You’d expect to see aggressive pricing pressure out of them, which has a cascade effect,” Stumphauzer said. “If Kohl’s gets very promotional, then that affects the opening price points at Macy’s. It has a spillover effect.”

Busy Inventing

Having turned Black Friday and Cyber Monday into shopathons, retailers are busy inventing new shopping days.

J.C. Penney, Sears and its Kmart chain proclaimed on the front pages of their websites on Dec. 5 that it was Cyber Monday, a week after the actual event occurred. On this Cyber Monday, a term invented by the Washington-based NRF in 2005, deals ranged from 40 percent off a DVD player from Samsung Electronics Co. to 80 percent off a children’s camcorder.

Last week, Gap’s Banana Republic chain offered 30 percent off its merchandise in an event dubbed the “It’s not Black Friday” sale. The markdowns followed a greater-than-expected decline in November same-store sales.

After a 1.8 percent gain in November comparable-store sales trailed analysts’ estimates, Target Corp. yesterday began a three-day “Almost Last Minute Sale” with markdowns on such items as Stanley Black & Decker Inc. coffee makers and gift card giveaways. A week earlier, the discount chain held the “Big Toy Event” on Dec. 1 offering half off a second item.

“Target is excited to introduce a new savings event just in time for Christmas,” Kathee Tesija, Target’s executive vice president of Merchandising, said in a statement on Dec. 6.

Consumers should expect more “branded discount days like Cyber Monday,” Bassuk said. “The question is who is going to open on Christmas day?”

--With assistance from Sho Chandra in Washington and Ashley Lutz in New York. Editors: Robin Ajello, Rick Schine

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net


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