(M) Hot Christmas Deals Can Eat Margins

It’s raining discounts at stores as retailers take their final lap before Christmas. Shoppers are offered discounts of 40%, 50% or even 60%. Further, buy one get one free comes as extra toppings.

Apart from money offs, flexibility in shopping through smartphones and tablets, free shipping and 24-hour shopping facility from retailers like Macy’s Inc. (M) and Toys “R” Us are like icing on the cake.

Moreover, Target Corporation (TGT), the operator of general merchandise and food discount stores in the United States, went one step ahead with the announcement of up to 50% discount on clothing and home decors after Christmas.

Hence, the question that crop in our mind is that ‘Is everything fine with the retailers or are they offering discounts at the cost of margins?’

We believe shoppers remain sensitive to negative macro-economic factors including increase in fuel and energy costs, credit availability and unemployment levels, which may negatively impact their discretionary spending.

Moreover, there is a general tendency that shoppers spend more primarily to buy essentials and generally looks for value adds.

Therefore, to make the most out of the busiest shopping season, the retailers have piled up their inventory level, which continues to remain a drag on the margins of retailers.

Evidently, for Aeropostale Inc. (ARO), Urban Outfitters Inc. (URBN) and American Eagle Outfitters Inc. (AEO), increased markdowns ate up the margins.

Urban Outfitters noted that gross profit for the third quarter of 2011 tumbled 8.4% to $216.1 million, whereas gross margin contracted 571 basis points to 35.4% due to higher merchandise markdowns to sell through slow-moving stock of women’s clothing at both Anthropologie and Urban Outfitters.

Further, increased markdowns and contracting merchandise margins dragged down Aeropostale’s third-quarter 2011 results.

Following the similar trend, American Eagle’s higher markdowns led to a decline of 1.1% in gross profit during the third quarter of 2011, while gross margin contracted 450 basis points to 37.1%.

However, early sales numbers released by National Retail Federation and ComScore Inc, global leader in measuring the digital world, states that the shoppers shrugged off their economic woes.

Moreover, the companies are focusing on cost containment, inventory management, and merchandise initiatives to improve margins through leverage on buying and occupancy expense.

Going forward, it remains a wait and watch story whether retailers are able to cater to the needs of consumers while growing their volumes by ensuring foot traffic.

AMER EAGLE OUTF (AEO): Free Stock Analysis Report

AEROPOSTALE INC (ARO): Free Stock Analysis Report

MACYS INC (M): Free Stock Analysis Report

TARGET CORP (TGT): Free Stock Analysis Report

URBAN OUTFITTER (URBN): Free Stock Analysis Report

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