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Sales Cutting into Retailer Profits

By Linda McDonough on December 13, 2016

The cardboard boxes are piling up in my front hall. Each day the poor mailman lugs another up the steps as I’m off working or running or hiking—basically doing anything but holiday shopping at the mall.

And while it may not look like it from the volume of boxes, I’m spending less than last year. DynamicAction, a merchandising analytical firm that tracks $8 billion of consumer transactions globally, reports that holiday discounting is on the rise. Promotions are up 52% from last year’s holiday season. Deals of up to 30% off and industry favorite BOGO (buy one get one free) are common. Lord & Taylor, a privately-owned chain of upscale department stores, is crowing on the radio about 70% off merchandise and there’s still 12 days left to Christmas Eve.

While department stores aren’t making much money this season, there are plenty of stock that will profit from this trend. Although a few of my retail put purchases were swamped by the Trump rally, many of the underlying stocks have begun to roll over and I still have one position that I feel quite good about. I also just added a new name to my Profit Catalyst Alert portfolio that’s a company with software that helps retailers keep their hands on the profits before they slip away to the web.

I’ve been hearing first hand from the few retailers reporting earnings or giving sales updates that promotions are intense. L Brands, the parent of Victoria’s Secret and Bath and Body Works stores, noted that profit margins in November were hit particularly hard due to promotional activity. Vera Bradley, a stock that I had recommended in the past, just lowered numbers for the fourth quarter due to the markdowns required to entice buyers.

Promotions are particularly dangerous in this era of mobile shopping where consumers can compare prices with the click of a button. When a customer needs only to pull up another web site to buy the same product at a lower price, retailers must match prices. It’s a dizzying and dangerous spiral.

Industry expert DynamicAction notes that profit margins for retailers have been reduced by 19% so far this holiday season. Free shipping, an enticement retailers tried to avoid last year, is up 3% and is a requirement for many web shoppers. DynamicAction recommends retailers hold firm with standard shipping as the calendar races closer to Dec. 25 with the hope that procrastinators will flinch and pay for expedited shipping.

Most worrying is the statistic noted by the analytical firm that returns are up 26% so far this holiday season. It seems that consumers are overbuying while at stores or perhaps buying online two items in different sizes and styles with a plan to return one. Retailers hate returns, the unknown liability lurking in the raw dawn on December 26 that threatens to erode what little profits they’ve collected.

It looks like this year’s holiday season may be delivering a lump of coal to the retailers.


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