RetailSails

Driven by heavy promotional activity and a strong finish to the year, most retailers posted better-than-expected December sales. However, the higher sales came at a price, as many chains warned that a combination of aggressive discounts, higher input costs and weak sales of winter-related merchandise will crimp 4th quarter margins.

Total net sales for the 23 chains we track increased 5.6% from a year ago to $53.98 billion in December, while same-store sales rose 3.6% on top of a 3.3% gain last year – this was the 28th straight monthly gain after 12 consecutive months of declines. However, it was a month of winners and losers as only 15 of 23 chains reported comp gains for the month compared to 19 last December. Total holiday season (November-December) sales increased 4.9% to $90.095 billion and comparable store sales rose 3.4% following a 4.2% increase in 2010.

Most holiday business was driven by strong foot traffic and sales during Black Friday weekend and the week leading up to Christmas, with a lull in between, as retailers pulled out all the stops with expanded store hours and aggressive discounts. Online sales were consistently strong throughout the season, rising 15% to $37.2 billion over last year according to comScore

Standouts included pretty much the same names we have seen out-perform all year: The Buckle (+8.9%), Zumiez (+10.0%) and Limited Brands (+7%); Off-price stores TJX (+8%) and Ross Stores (+9%) who continue to offer the best value proposition and take market share; high-end chains Nordstrom (+8.7%) and Saks (+5.8%) which are able to push full-price selling and have yet to see a much of a slowdown in affluents’ spending; and Macy’s (+6.2%) who absolutely destroyed rivals during the holidays and continues to be the best name in the department store space.

Laggards in December included all the usual suspects: The Gap (-4%), who might as well just put the old “our performance was below our expectations” excuse on repeat, JC Penney (+0.3%) who slashed 4th quarter guidance on much weaker-than-expected sales, Kohl’s (-0.1%), who also trimmed guidance fairly significantly, and Target (+1.6%), which is obviously losing its everyday low-price leader war with Walmart and missed expectations once again.

Warmer weather and a lack of any major storms had a significant negative impact on sales of winter-related merchandise, leading many chains to resort to heavy discounting in mid-December, and we saw up to 70-80% off heavy gauge sweaters and outerwear in the week after Christmas. According to Weather Trends International, national temperatures were higher than last year and their long term average for almost all of November and December.

Just about every chain mentioned weak winter gear sales and echoed Tony Buccina, Vice Chairman, President – Merchandising of Bon-Ton, who commented, “December sales and margin were negatively impacted by unseasonably mild weather in all our markets throughout the month.”

For the most part, retailers were very cautious heading into November, with the lowest inventories on record relative to sales. This probably limited the panic discounting we saw back in late 2008, but there were still a surprising amount of earnings warnings from the likes of JC Penney, Target and Kohl’s.

While overall holiday season sales came in better than expected and consumer confidence continues to improve, we remain very concerned about the “resiliency” of consumers heading into the new year, especially considering the popularity of layaway purchases and the savings rate returning to recessionary lows.

Over the past three and half years, growth in U.S. consumer spending has averaged a paltry 0.2% adjusted for inflation, the weakest in the post-World War II period. Add to that the fact personal income has barely kept up with inflation since the end of the recession for most Americans, and it’s easy to see why the spending binge we saw over the holiday probably won’t last.