Retail Earnings: Summer's Dog Days Will Lead to Fall Sales Struggles

After the holiday season of 2009 and a stronger-than-expected spring, the doldrums have hit summer even harder than usual.

As merchants wound down second-quarter reports, the talk was shot through with disappointment at the slow pace of the economic recovery and a sense that retailers will have to work hard to wring out more sales from the upcoming Halloween and year-end holidays. The word "promotional" was bandied about quite liberally in analyst conference calls: Advertising, product launches and special events will be on the rise in fall.

"All retailers must face the realities of the current macro environment. The consumer is more price sensitive than ever and the environment is highly promotional," said Thomas Johnson, co-CEO of Aeropostale (ARO). The teen apparel chain reported a 21% increase in second-quarter earnings and held to its previous guidance for the second half of the year, despite the economic outlook.

But several other merchants toned down their sales and earnings forecasts, fearing sales will fall short of their rosier forecasts in the first quarter. That group included BJ's Wholesale Club (BJ), JC Penney (JCP) and Kohl's (KSS).

It's the Economy

"There is no question that in Q1 we felt the economy was improving ... but Q2 gave us a very different feeling about the consumer's mindset," said BJ's CEO Laura Sen.

The club chain blamed price cuts in essential items it made to match Wal-Mart Stores (WMT) and supermarket chains for shrinking its average receipt by 1% and cutting into its profits for the second quarter. BJ's still managed a 4.4% increase in comparable sales -- for stores open at least a year -- and a 4.7% increase in earnings over the year before, thanks to increased traffic.

Even some merchants who raised their guidance acknowledged they did so in spite of the economy. Home Depot (HD) CFO Carol Tome said as much when the hardware giant boosted its outlook to call for comparable sales to rise 2.6% for the full year. When it made its previous forecasts, the company had expected average total per ticket to rise in the second half, but professional builders still aren't spending more, and that's dragging down the average receipt. Most of the sales growth this year will have to come from increasing the number of transactions, said Tome.

Weak Consumer Sentiment Means Harsh Competition

Many other merchants, including Target Corp. (TGT) also said traffic will have to be key to building up sales in the second half.

"It's really going to be about consumer sentiment and what's going to happen as we go into the third and fourth quarters from the economy standpoint," Target CEO Gregg Steinhafel told analysts.

Concerned shoppers are still spending less, so stores will work hard to boost traffic and ring up more of these reduced sales.

"We're preparing for the fall season to be a very competitive selling environment," said Mike Jeffries, CEO of Abercrombie & FItch (ANF). Jeffries repeatedly put off analysts' questions about specific merchandising and promotional initiatives, but CFO Jonathan Martin said the teen retailer is "prepared for an aggressive promotional environment" this fall.

With back-to-school sales starting to look a little iffy now, retailers are shifting their hopes to Halloween and the winter holidays. Target announced another "event" launch, a Costume Couture line for Halloween from designer Simon Doonan, available for a limited time limited time beginning Sept. 12 at selected stores. Limited Brands (LTD) said its Victoria's Secret chain -- which is also introducing a line of adult costumes for Halloween -- will advertise on television again in October to support a product launch.

Looking Ahead to the Holidays

All the merchants claimed they have prepared for the fall promotions and will do their best to protect their profit margins. But most admit that they will be under pressure, as labor and material costs rise and a shoppers' price sensitivity makes it nearly impossible to pass on those higher costs. The department stores reporting last week said as much.

The managers at Abercrombie & Fitch were most candid in admitting they will accept some margin erosion in the short term to build sales, but most merchants said they will try to hold the line on promotions to avoid a repeat of the devastating markdowns of 2008.

While no one was ready to share details, stores have already ordered the merchandise and are working on the promotional plans for the holidays, starting with the Black Friday kickoff on the day after Thanksgiving. But as both the economy and shoppers seemed to run out of steam this summer, retailers say they are leaving themselves some room to maneuver. Of course, four months before the holidays, no one wants to tip their hand yet, except to say they will not give their rivals quarter.

"We think the promotional environment is going to be more rational than it was Black Friday," said Larry Stone, COO of Lowe's Cos. (LOW) "But we can't control what our competitors may do."