Many retailers may have maintained holiday promotions over the weekend that were comparable to 2018, but they’re not immune to what see industry experts believe could be fourth-quarter margin troubles, due in large part to an influx of shoppers skipping the stores to buy online.
These discounts equate to “flat promo levels for 60 percent of retailers, and elevated promotions for 30 percent,” financial services institution Jefferies wrote in a research note detailing its 12th annual Black Friday promo survey.
For example, Victoria’s Secret and Pink both offered buy one-get one free on almost everything, an escalation from last year’s 40 percent off bras and all bras $25, respectively. But offering similar or deeper discounts than 2018’s promotion levels didn’t seem to help some brands.
Analysts at Jefferies noted that Gap and Banana Republic drew weak traffic despite offering essentially the same 50 percent off discounts as last holiday. Coach advertised 30 percent off boots, small clutches and wallets, and 50 percent off purses, relative to 2018’s 30 percent the entire purchase, with some exclusions, and 50 percent select best-selling bags.
Shoppers could purchase bags for $119 at Michael Kors, which offered an extra 25 percent off clearance items.
Last year, the brand offered a 40 percent discount on the Mercer handbag style, and 25 percent off already reduced styles, such as the Cynthia bag and backpacks. “Aspirational brands including Michael Kors and Coach saw tepid traffic during our checks, despite observed higher promos from wholesale accounts,” the report said, noting that Macy’s was offering a Michael Kors-specific promo.
“Despite robust e-commerce growth this weekend, brick-and-mortar sales remained under pressure,” the report said. “Looking ahead, the shortened selling season between Thanksgiving and Christmas and incremental shipping expenses from online growth could create top-line and margin pressure, which is something we believe investors should be cognizant of, particularly in [the fourth quarter].”
In a Cowen and Company report, analysts noted that some brands such as Vans and Lululemon were mostly full price over the holiday weekend, while “Nike, Calvin Klein and Adidas felt most elevated from a promotional cadence year-over-year. Under Armor showed slight improvement year-over-year in depth of promo but every [stock keeping unit] at 30 percent off with orders of $50 or more, points to a long road back to premium positioning.”
The Cowen report said the intensity of some promotions across the space felt heightened relative to last year and “speaks to margin issues across the softlines space–particularly in apparel.”
Natalie Kotlyar, who heads up the retail practice at consulting advisory firm BDO, said of the shortened holiday season and consumers’ ability to price shop before they buy, “I expect that there is going to be an erosion of margins in the fourth quarter. Many retailers bought in advance of [September’s] tariffs. Because many of them stockpiled their inventory, they will need to get rid of it at the end of the fourth quarter or beginning of the first quarter to bring in fresh inventory. That will mean markdowns and margin erosion.”
Of course, there’s still a chance some retailers could pull off a miracle if the weekend sales didn’t fare as expected, and save themselves some margin pressure to boot.
According to Marie Driscoll, managing director of luxury and fashion at global research and advisory firm Coresight Research, January that could help retailers meet their sales goals for the fourth quarter. Gift cards are still hot items, not to mention a fair amount of post-holiday returns.
If retailers bring in new merchandise that’s exciting for Dec. 25 and the days that follow, many retailers who might be disappointed now still have a shot at making their margins. “This is the beginning the Super Bowl and there are still many innings to go. There’s still Super Saturday ahead, Driscoll said, referring to the last weekend before Christmas Day when retailers will be pulling out all the stops to grab what they can in market share before they start post-holiday merchandise markdowns.
Mike Zuccaro, retail credit analyst at Moody’s Investors Service, said storms over the holiday weekend didn’t help store traffic at the malls. And while house-bound consumers may have spurred online shopping to new heights, digital sales likely would have lower margins due to free or reduced-cost shipping, not to mention fewer impulse purchases.
Zuccaro keeps tabs on wholesalers, and said those that sell to department store customers are most likely to be challenged. “For the companies producing the inventory, one question will be did the retailers order the right amount. Last year, the department stores went too far in cutting too much inventory.”
He said the data point to watch will be the depth of the discounting as the season progresses. “When you see 25 percent off, or even 40 percent or 50 percent off now, that’s hard to tell if all that’s part of the normal promotional cadence. But if you start to see really steep discounts, such as what’s usually 40 percent off becoming 60 percent off or more, that’s a sign that traffic is much more challenged,” he advised.