Retailers tighten belts to bring numbers up

Bob Childress shows his daughter Isabelle a dress Tuesday at a Wal-Mart in Deptford, N.J. Wal-Mart has performed better than it predicted.
Bob Childress shows his daughter Isabelle a dress Tuesday at a Wal-Mart in Deptford, N.J. Wal-Mart has performed better than it predicted. (Matt Rourke/associated Press)
By Ylan Q. Mui
Washington Post Staff Writer
Saturday, November 14, 2009

Retailers cut costs and slashed inventory to reach better-than-expected profits during the third quarter but warned that consumers remain reluctant to shop.

National chains reporting results this week included Macy's, J.C. Penney and Wal-Mart, the world's largest retailer. Each raised its business forecasts despite sales declines at stores open at least a year, a key measure of health for retailers.

Retailers have been casting a wary eye on this Christmas season, particularly as the unemployment rate climbed into double digits. The holiday traditionally accounts for as much as 40 percent of all sales for the industry, making it the biggest selling season of the year, and stores are still scarred from last year's bloodletting. On Friday, Reuters and the University of Michigan reported that consumer confidence fell on their index in October to 70.6, down from 73.5 in September. That's still significantly better than the results from a year ago, but a majority of consumers reported that their finances worsened, a sentiment that has now persisted for 13 consecutive months, the longest decline in the survey's 60-year history.

"The ongoing economic recovery will be unlike any other due to changes in consumer spending preferences," said Richard Curtin, director of the survey.

The National Retail Federation, an industry trade group, has predicted that holiday sales will fall 1 percent, to $437.6 billion, well below the 10-year average growth of 3.39 percent. Such gloomy prospects have prompted the industry to gird for battle this season. Retailers spent the early part of the year weeding out underperforming stores and laying off workers to cut costs. They cleared out inventory and reduced the amount of merchandise on shelves. According to the NRF and IHS Global Insight, the amount of cargo imported this year is projected to fall to 12.7 million containers, down nearly 17 percent from last year and the lowest level since 2003.

At Wal-Mart, inventory plunged 6.2 percent at its U.S. stores during the third quarter, the company said this week. Over the past year, the world's largest retailer reduced domestic inventory by $1.8 billion.

"Few retailers can claim this kind of operating performance," Wal-Mart Vice Chairman Eduardo Castro-Wright told analysts.

That helped push third-quarter earnings up 3 percent to $3.2 billion (84 cents per share), more than the company had previously forecast. But U.S. same-store sales fell 0.4 percent, not including fuel sales, on lower prices for food and consumer electronics. Castro-Wright said Wal-Mart sold 25 percent more televisions during the third quarter than it did a year ago, but the average selling price was down 20 percent.

Wal-Mart said it made up the difference through strong performance in food and health sales. Revenue rose 1.1 percent, to $99 billion. It raised guidance for the year to $3.57 to $3.61, from $3.50 to $3.60.

J.C. Penney said that stocking less inventory is helping the department store sell more products at full price. Though profit dropped 78 percent from a year ago, to $27 million, because of a one-time pension expense, the company said sales were stronger than expected and upgraded it forecasts for annual sales.

"Last year, our industry was over-inventoried and J.C. Penney was not immune from the aggressive clearance selling," chief executive Myron E. Ullman told analysts in a conference call on Friday. "This year is different."

Macy's also saw sales begin to stabilize. The department store chain said it lost $35 million during the third quarter compared with $44 million a year ago. For the entire second half of the year, the retailer said same-store sales are now expected to be down 2.1 to 2.6 percent, a significant improvement from the decline of as much as 6 percent it had previously predicted.

Still, the company acknowledged that its forecasts were still negative and the consumer recovery still tenuous.

"I would be remiss, though, not to mention that there are more uncertainties than usual in the environment," Macy's Chief Financial Officer Karen M. Hoguet said. "Unfortunately, we all just have to wait and see."

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