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Weather Not the Only Culprit in Chilly First Quarter Retail Results

When the going gets tough, blame it on the weather.

That seemed to be the position adopted by many apparel retailers who had disappointing news to report on first quarter sales and earnings. Total sales at the top 40 publicly-held apparel retailers rose by a tepid 0.9% in the three months ended May 2, 2014 (the first quarter of fiscal year 2015), barely keeping up with inflation. Comparable store sales were essentially flat, rising by a collective 0.4%.

Sluggish sales growth and higher-than-expected operating expenses took a toll on profitability as well: net income for the group fell by a whopping 25 percent.

Severe winter weather certainly played a role. February brought the most snowfall in four years to the U.S. Early in the month, a midweek snow and ice storm affected over 115 million people in 30 states. Gap Inc. was forced to close more than 450 stores for at least a day. Macy’s CEO Terry Lundgren, after calling January 2014 “one of the most difficult months of my career” at a March investor conference said his reaction to the weather at the beginning of February was “Here we go again.” The impact of weather on sales at apparel retailers, many of whom were starting to put out early spring merchandise, was devastating.

However, February is generally a pretty slow month for apparel, and the following two months were considerably better from a weather standpoint. March, though still unseasonably cold in the Northeast, brought calmer skies and warmer days to the West and Southeast, and yet the sluggish mall traffic and conversion rates persisted. In April, the late Easter and warmer weather in most of the country should have rejuvenated sales, which it did to some extent, but not by enough.

PA-based Planalytics, a weather intelligence company that provides forecasting and analysis to the retail industry, concluded that weather’s impact on apparel and other soft goods sales explained at most 2 percent of the first quarter shortfall. Had the weather been normal, total sales would have grown by 3 percent instead of 1 percent–still nothing to write home about.

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According to San Jose-based analytics firm RetailNext, store traffic declined 6.5% in the first quarter compared to the same period last year. Shelley E. Kohan, the firm’s VP of Retail Analytics, said, “Weather plays a role in these results with customers being less motivated to shop in inclement weather. And, the cooler temperatures play havoc with merchandise content in the stores because customers are not in the mindset for spring with unseasonable weather.”

The weather didn’t treat all retail channels equally, however. Department store total sales dropped by almost 2 percent in the quarter, though comps rose. Above-average sales increases by Nordstrom and Penney were more than offset by slumps at Sears, BonTon and Kohl’s. Macy’s suffered a 1.7% drop in both total and same-store sales, but earnings rose 3.2% to $244 million, the best profit showing among the department stores.

Total sales at specialty apparel stores rose by 2.3% though comps fell 1.7% and net income plunged 31 percent for the sector. The best sales performance in the group came from Urban Outfitters, whose total sales gained almost 6 percent, but whose net earnings fell by 20 percent – better than the average for specialty stores, but indication that its sales growth came at the cost of profits. The only specialty retailer in the group to see a significant earnings gain was Victoria’s Secret parent L Brands, whose net income rose 10.6% to $157 million. Total sales growth at L Brands was up 5.4% and same-store sales growth was up 2 percent.

Specialty chains catering to younger customers seemed to struggle the most in the quarter. Teen retailers, including Abercrombie, Buckle, American Eagle and others, saw total and same-store sales drop by 3 percent and 1.7%, respectively, and earnings plunge by 31 percent. Wet Seal, Cache, and Express also had a tough quarter with steep total and same-store sales and earnings declines. These stores’ woes stemmed from intensified competition from big-box fast fashion players like H&M and Forever 21 and from the stubborn job market that has impacted both the spending power and wardrobe needs of Millennials age 15-35.

The off-price channel once again surpassed its department store and specialty chain counterparts in both total and same-store sales, which rose by a collective 5.1% and 1 percent, respectively. Net income at Ross rose 4 percent, but was uncharacteristically flat for TJX. TJX CEO Carol Meyrowitz revealed in the company’s quarterly conference call that weather had a 4 percent impact on sales in affected regions in the period.

What were some of the other factors that resulted in less-than-stellar first quarter results? Rampant promotions eroded gross margin across the board as retailers paint themselves into a corner with perpetual percent-off promotions, coupons, sales and buy-one-get-ones. They’ve trained the consumer to only buy when there’s a deal. Over time, the consumer seems to need a deeper discount and more coupons, until the point at which it seems like everything is on sale all the time.

E-commerce players continue to steal market share from traditional retailers. Amazon’s first quarter product sales rose 18 percent. Consumers have a seemingly infinite number of shopping options today, and can shop from the comfort of home.

Capital expenditures are rising faster than many retailers had expected. Apparel retailers like Nordstrom, Abercrombie & Fitch, Macy’s and others, are investing heavily in technology and store buildout just to stay competitive. A growing number, like Gap for example, are opening stores internationally to take advantage of growth opportunities outside the U.S.