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Takeaway: A strong final week wasn’t enough to save the month as retailers had already turned to aggressive markdowns.

A strong final week wasn’t enough to save the month as the dwindling number of retailers that are still reporting sales results had already turned to aggressive markdowns elevating Q4 margin related earnings risk.

December Retail Sales coming in better than expected with 12 companies beating expectations compared to 6 misses was little consolation in light of recently lowered numbers. With tough January comps ahead, one of the key factors to year-end performance and start to 2013 will be inventory induced margin risk. On the whole, the industry was fairly lean headed into the holidays, but in the absence of early holiday demand that mattered little into month’s end as retailers accelerated markdown activity.

In the chart below, note how there was only one week in the final five weeks of the year where sales growth bested prior year levels. This chart is important because it is the ICSC index, which is a weighted index of 80 (non-food and non-auto) retailers across sub-categories that dwarfs the 18 that currently report same store sales numbers publicly. Note that starting in February, that sample will be down to 15. Our sense is that it will be closer to zero in a year, and we’ll close the chapter of information flow that has always been same store sales day.

ICSC Same Store Sales Index

SSS Focus on Margins, Not Sales - ICSC

Back to the call-outs...

For the second consecutive quarter, KSS takes home the prize for negative callout of the day. This hardly comes as a surprise with KSS the most over-inventoried department store retailer headed into the holidays (see charts below). As a result, KSS confirmed they turned to deeper than planned discounts in order to clear the decks headed into fiscal 2013 taking down 4Q estimates by more than 20% in the process. Retailers with more favorable sales/inventory levels (i.e. at less risk) include TJX, ROST, and TGT.

The biggest positive callouts were COST and JWN both of which came in nearly 2x expectations of ~4.5% comps. While more impressive for COST given its sheer size, the strength of JWN at the high-end is perhaps most notable given recent concerns regarding luxury retail. This is a positive read-through for handbag related names (FNP, KORS, COH) with the category highlighted as running above comp average.

Other Callouts:

  • Off-price strength with ROST and TJX only retailers to raise numbers into year-end. It’s little coincidence that both companies sport superior sales/inventory levels relative to peers.
  • GPS (+5% vs +3.9%E) Old Navy coming in VERY strong in December rebounding from three consecutive months of slowing growth – offset in part by deceleration in all other segments.
    • Lap JCP induced comp reacceleration starting February.
    • Back to the well approving $1Bn share Repo plan (replacing prior $1Bn plan)
  • M (+4.1% vs +4.1%E) in-line with online up +52%
    • Announced closing 6 stores to account for $2-$4mm in related costs (plan to open 9 in 2013)
    • Taking 4Q outlook down $1.91-$1.96 (was $1.94-$1.99)
  • TGT (flat vs +1.4%E) strong finish to Dec not enough to offset first 3-weeks
    • Inventory in “very good condition at month-end”
  • KSS (+3.4% vs +1.4%E) sales ‘came late in the holiday’- as a result at deeper discounts than planned
    • Taking ‘necessary markdowns in 4Q to manage inventory’ into Spring
    • Sharply reducing outlook to $1.60-$1.62 (was $2.00-$2.08E) in 4Q and $4.11-$4.13 (was $4.52-$4.60)

SSS Focus on Margins, Not Sales - MidTier wJCP SIGMAs


SSS Focus on Margins, Not Sales - MidTier SIGMAs


SSS Focus on Margins, Not Sales - GPS SSS by Seg