Holiday discounts leave retailers with thin profits

Brad Cheskes of Chicago shops at Macy's on the city's State Street. Shoppers seemed inclined to buy only if they saw huge discounts.

NEW YORK -- December holiday sales figures came in at a decent level, retailers said Thursday, but not enough for a blockbuster season.

Sales at stores open at least a year at major retail chains rose 3.4 percent compared with December, 2010, according to Thomson Reuters data, just slightly above the 3.3 percent that analysts had expected.

But those sales were gained largely by big markdowns that likely will lead to lower profits at retailers, and chains including Target, Kohl's, and J.C. Penney lowered their fourth-quarter profit expectations.

Shoppers seemed inclined to buy only when they saw huge discounts. That suggested that U.S. consumers are still not back on their feet.

"Retailers came in with pretty conservative assumptions and they were hoping to blow them out of the water -- they really didn't," said David Bassuk, managing director and head of the retail practice at AlixPartners, a consulting firm. His store visits over the holidays indicated many promotions were "unplanned," he said, which retailers resort to as a response to slow spending.

"Retailers hope that as they plan some promotions on key items, that will entice the consumer to spend money," he said. "That didn't happen -- the planned promotions were not as exciting as the consumer today expects, so the retailer has to revert back to things that were unplanned, such as '50 percent off our whole store' or '60 percent off our whole store,' which is when you can see times are tough."

The top five performers all beat analyst estimates by at least 3 percentage points. Those were teen stores Zumiez and the Buckle, large discounters Ross and TJX, and Nordstrom.

Apparel stores, which were heavily promotional as the month went on, fared the best as a sector, with sales at stores open at least a year increasing 7.2 percent.

Those figures exclude the Gap Inc. chains, which include Old Navy and Banana Republic, where same-store sales declined 4 percent. The Gap, Wet Seal, Cato, Bon-Ton, and Freds reported the worst same-store sales.

Target and Kohl's, which do huge promotions around the holidays, came in below analyst estimates, and both reduced fourth-quarter profit expectations Thursday.

Target's same-store sales were up 1.6 percent, versus expectations of a 3.1 percent increase. Target said in a statement that electronics, movies, music, and books were particularly weak performers. It reduced its fourth-quarter profit expectations to $1.35 to $1.43 a share, versus the $1.43 to $1.53 it had issued.

Kohl's same-store sales fell 0.1 percent; analysts expected a gain of 2.2 percent. Kohl's said in a release that low sales in cold-weather gear were partly to blame. It lowered its fourth-quarter profit expectations to $1.70 to $1.73 per share, versus the $1.93 to $2.04 it had issued.

J.C. Penney also lowered its fourth-quarter estimate, saying it now expected to earn $0.65 to $0.70 a share instead of the $1.05 to $1.15 it had expected.