In spite of all the broad-based anxiety about stubbornly high unemployment rates and the prospect of another economic slowdown or even a recession, consumers still went shopping in December. Indeed, the Same Store Sales (SSS) Index fared better than expected, posting a 3.4% gain in December, ahead of the final estimate of 3.3% and well ahead of the gain of 2.4% recorded in December 2010. Overall, more retailers beat that average than fell short. Historically, about 53.1% of companies have posted same-store sales that were better than the average; in December, that figure jumped to 63.2%, as shown in the chart below.
Now for the bad news: it took a lot of discounts and other promotions to lure those consumers into stores during the holiday season, and to tempt them to open their wallets and spend. The upcoming earnings reporting season will reveal the magnitude of the negative impact of that discounting on retailers’ margins and their bottom lines.
And even great promotions weren’t enough to persuade consumers to spend at several retailers. The Gap, Inc. (GPS) offered consumers a number of special deals but still posted weak SSS. “While we competed aggressively across our brands, our performance was below our expectations,” the company announced in a press release in the first few days of the New Year. The Wet Seal, Inc. (WTSLA) missed its final lowball SSS estimate, which predicted a decline of 1%, and instead posted a 3.7% slump in same-store sales. Target Corporation (TGT) also fell short; posting a gain in same store sales of only 1.6% compared to a forecast of 3.1%. In the wake of that underwhelming December result, Target has just cut its earnings forecast for the fourth quarter of 2011.
As we highlighted in this report, luxury brands proved the exception to the rule this holiday season; the higher the price point, the less discounting was required to convince consumers to spend. Saks Inc. (SKS) and Nordstrom, Inc. (JWN) posted strong SSS results of 5.8% and 8.7%, respectively, in December. Based on our research, we see earnings forecasts for companies that fall into this category rising to levels that are above actual results recorded a year ago, based on such strong sales performances. Indeed, comparing current earnings estimates for these luxury goods retailers over the coming fourth quarters (for the period from the fourth quarter of 2011 to the third quarter of 2012), we see those forecasts beating prior-year performance in each period.
Other stand-out performers included Limited Brands, Inc. (LTD). An impressive 11% jump in SSS at its Victoria’s Secret division contributed to Limited’s robust 7% gain in same-store sales during December. In this August 4th Alpha Now story, we highlighted the quality of the Limited’s earnings, noting its improving return on assets, which in turn has been driven by higher asset turnover and a gain in operating profit margins. These, together with strong cash flow generation, gave the company a StarMine EQ model ranking of 99 (out of a possible 100) based on financial data for the quarter ended April 30, 2011. (This tool ranks companies based on the degree that their earnings are from sustainable sources.) Today, with another two quarters of data to hand, that score remains an impressive 96, placing Limited Brands solidly amongst the top tier of all North American companies.
The table below illustrates the climbing margins at Limited Brands, showing gross margins, operating margins and net margins, all of which are widely scrutinized by investors and analysts alike. All three have been on a rebound since late 2009 and have outpaced the overall industry’s recovery.
Source: Thomson ONE / StarMine
After twenty-eight consecutive months of negative same store sales, Limited Brands showed signs of a turnaround and posted a positive comp in November’09. Since 1999, the retailer’s long-term average SSS growth rate has been 2.7%; the fact that its 11.3% average monthly growth rate over the prior year’s level in 2011 topped the same average monthly growth rate of 8.7% reported in 2010 over 2009 levels, signals that consumers are increasingly willing to part with their disposable income at Limited stores. Those results have been even more impressive at the Victoria’s Secret division, which recorded an average monthly gain in SSS of 15.7% over the course of 2011, above 2010’s average monthly gain of 12.7% in same-store sales. The recent recession certainly has taught middle-class consumers, in particular, to shop for value, and that is something Limited Brands understands. To adapt to this new breed of value-conscious consumers, the chain has introduced lower-price point products, including the Pink line of products available at Victoria’s Secret as well as in standalone stores. This helped the retailer build loyalty among existing customers while attracting new ones.
For several years, Victoria’s Secret has used iconic supermodels to spearhead media campaigns, including its flashy and flamboyant runway shows. This has boosted its brand and helped sell lingerie and swimwear that is both stylish and on-trend, as the first swimwear catalog of 2012 – featuring the new must-have push-up bra bikini – demonstrates. Moving into the post-holiday doldrums, Victoria’s Secret is conducting its largest sale of the year – a semi-annual event that will help boost January comps as well as shift the season’s inventory. Given all these factors, we currently expect Limited Brands to post earnings per share of $1.44 for the fourth quarter of 2011, well ahead of the $1.26 a share it earned in the year-earlier period. That won’t mark an end to the bullish news, however: we expect Limited to follow that performance by delivering stronger earnings in each of the three quarters that follow. Fashion may be fleeting, but retailers that discover the way to combine brand strength, marketing prowess and value pricing will be able to tempt customers to part with their hard-earned cash more often.
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