Retailers’ profit takes a hit after steep holiday discounts

Sam Hodgson/Bloomberg - Heavy discounts during the holidays are going to hurt profits, companies said Thursday. A shopper carries a Victoria's Secret Stores bag at the Westfield North County Mall in Escondido, Calif.

Bargain-shoppers had a good holiday season as retailers slashed prices to entice customers. But those heavy discounts are hurting corporate profits.

On Thursday, retailer L Brands — the parent company of Victoria’s Secret, Bath & Body Works and La Senza — lowered its earnings estimate for the next quarter. Family Dollar Stores, a discount retailer, did the same. Both companies blamed deep holiday discounts for squeezing profit.

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“Our core customers continued to face economic uncertainties, and the promotional environment intensified,” Howard Levine, chief executive of Family Dollar Stores, said in a statement.

Plagued by slow sales throughout 2013, stores rolled out aggressive discounts and extended their shopping hours during the holidays, offering deeper concessions as the season continued. Meanwhile, customers were careful with their budgets, shopping online in record numbers and taking advantage of free shipping deals.

Clothing store Abercrombie & Fitch said its November and December comparable-store sales decreased 6 percent from a year ago. Sears Holdings, the parent company of Sears and K-Mart, also reported that through the nine-week period that ended Jan. 6, comparable-store sales declined 7.4 percent. (“Comparable store” refers to shops that have been open at least a year.)

Retailers will be reluctant to repeat an aggressive discounting strategy, said Chris Christopher, senior economist at IHS Global Insight. “If you’re taking a hit on profits, maybe you’re better off keeping the prices more stable,” he said.

The industry is also likely to be helped by a stronger economy and improving consumer confidence in 2014, Christopher said. That will allow retailers to focus on expanding their online sales even as they court shoppers by opening on Thanksgiving Day, he said.

Even though profit took a hit, last-minute holiday shoppers boosted sales above expectations, according to a report by research firm ShopperTrak released this week. But the number of customers visiting stores fell more than 14 percent compared with 2012. Earlier this week, Walgreens also said it had less customer traffic in December.

Department store Macy’s announced that it was letting go of 2,500 workers and integrating some regional stores in a move to reorganize the company. At the same time, the retailer said it would continue adding positions in its online department and other areas. Macy’s reported higher sales in November and December and said it expects continued growth in 2014.

The government’s official estimate on December retail sales is to be released next week. The full effect of holiday discounting will be apparent when retailers release their earnings statements next month.

 
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