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Holiday profit seen higher as some retailers limit deals

Bloomberg News

December 27. 2012 10:17PM

WASHINGTON - Washington and Hurricane Sandy weren't able to ruin everything for retailers this year.

While one estimate put holiday sales gains at only 0.7 percent, retailers from Macy's to Abercrombie & Fitch controlled inventories heading into the holidays, enabling them to limit discounts.

Analysts estimate earnings per share for consumer-discretionary retailers in the Standard & Poor's 500 Index will increase about 13 percent in the fourth quarter, according to data compiled by Bloomberg as of Dec. 21.

A year earlier, profit slipped 3.4 percent on a share-weighted basis.

"The retailers coming out of the holiday season on top have done an excellent job with their inventories," Megan Donadio, a New York-based retail strategist for consulting firm Kurt Salmon, said Wednesday. "They've planned promotions carefully to ensure profitability."

Retailers are increasingly using sophisticated analytics in planning promotions, deciding how much to order based on previous sales and industry-wide demand, Donadio said. Most chains secured holiday goods months before Sandy hit in October, reducing the harm from power failures and transportation interruptions in the Northeast.

Consumers also have been resilient. While Republicans and Democrats have been unable to agree on a plan to avoid federal spending cuts and tax increases of $600 billion that would come into effect in January without action by Congress, the Bloomberg Consumer Comfort Index was little changed at minus 32.1 in the period ended Dec. 23, near a four-year high.

Retailers have gotten better at managing their inventories in recent years, keeping them from having to resort to steep discounts to prevent merchandise from piling up. The improvement will show up in a company's gross margin, or the portion of sales left after subtracting the cost of goods.

Retailers projected to have wider gross margins this season include Ralph Lauren Corp., whose gross margin may expand to 59.2 percent of sales in the quarter ending Dec. 31 from 57.1 percent in the same period a year ago, according to the average of five analysts' estimates compiled by Bloomberg.

Coach's gross margin will widen by more than 0.2 percentage points to 72.4 percent in the three months ended Dec. 31, analysts estimate. The margin at Macy's, the second-largest U.S. department-store chain, may be little changed at 40.9 percent.

Falling costs, including a 16 percent decline in cotton prices this year, are helping apparel sellers. VF Corp., which sells Wrangler jeans at retailers from Walmart to Gander Mountain, expects to post its highest-ever quarterly gross margin in the fourth quarter, Chief Financial Officer Bob Shearer told analysts in October.

"The industry is better positioned this year with the easing of apparel cost pressures," Michael Niemira, chief economist for the International Council of Shopping Centers, said Wednesday in a telephone interview. "That should help their margins. To that extent, it's a better environment for the retailer."


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