Retailers face frugal shoppers through 2009

The lower profits and muted outlooks this week from retailers such as J.C. Penney Co., Macy's Inc. and Nordstrom Inc. are heightening concerns among investors that shoppers' focus on necessities and buying at discounters could linger well into next year.

At least one mall-based merchant - Tween Brands Inc. - expects shoppers' fixation on low prices to remain even when the economy rebounds.

"I don't see how consumer spending turns around anytime before the second half of 2009," said Ken Perkins, president of research company RetailMetrics LLC. "Where are the new sources of funds coming from for the consumer? Clearly, the earnings reports show that we are living in a discretionary versus nondiscretionary world."

The divide, seen this week as discounter Wal-Mart Stores Inc. posted higher earnings and raised its outlook, will likely be on display again next week as luxury retailer Saks Inc. and Gap Inc. are expected to announce sluggish results. Even Target Corp., which is set to report second-quarter results Tuesday, has stumbled in recent months as its stores have a heavy emphasis on clothing and home furnishings.

Penney's chairman and chief executive, Myron "Mike" Ullman, told investors after the company reported a 36 percent drop in second-quarter profits and lowered its outlook that he expects "the environment to remain difficult" into next year.

"We know our customers are struggling," said Ullman, who believes that back-to-school sales will be weaker and also occur later this year than they did a year ago.

While oil prices have declined in recent weeks, gas at the pump still remain high. And shoppers are contending with higher prices on daily basics such as food that are not keeping up with their wages. The deteriorating economy overseas, which has been dragged down by U.S. economic woes, could also further derail the job market here, Perkins said.

But even low-price operators like Wal-Mart have their own challenges. The company raised its full-year earnings forecast after second-quarter profit rose more than expected, helped by tight inventory controls and a renewed focus on low prices that is attracting financially squeezed shoppers around the world. But the company said sales at established U.S. stores during the current quarter would grow just 1 percent to 2 percent, a sharp decline from the second-quarter's 4.5 percent increase as the benefits of the federal stimulus checks dry up. Same-store sales are considered a key indicator of a retailer's health.

The good news for retailers is that while they can't control the economy, they can monitor their expenses, particularly by reducing inventory. Such moves helped Penney and others to reduce markdowns on the selling floor, resulting in better-than-expected profits.

But retailers can only slash so long. At some point, they need shoppers to splurge on items like fashions. And the latest reports showed consumers' growing appetite for cheaper apparel.

Nordstrom said that conditions at its mainstay department store business remain difficult, while its discount stores called Nordstrom Rack have maintained strong sales growth. Nordstrom's same-store sales fell 9 percent in the second quarter, while Nordstrom Rack enjoyed a 6.3 percent gain.

Tween Brands saw same-store sales drop 11 percent at its Limited Too stores in the second quarter, but rise 3 percent at its lower-priced Justice stores. The company is converting nearly 600 Limited Too stores to the Justice brand in what Perkins called a "bold" move.

Penney predicted that total sales would drop by a low-single digit percentage in the third quarter and that same-store sales would drop in the mid-single digits in the same period.

The company earned $117 million in the three-months ended Aug. 2, down from $182 million a year earlier. Net sales fell 2.5 percent to $4.28 billion, while same-store sales dropped 4.3 percent.

Penney said it expects third-quarter earnings to be 70 cents to 75 cents per share. Analysts polled by Thomson Reuters project 76 cents per share.

Like other department stores, Penney is stepping up the number of exclusives it has in the store to differentiate itself from competitors.

For the back-to-school season, Penney introduced six new lines aimed at teens and young adults, compared with only one last year. Earlier this year, Penney unveiled American Living, an exclusive collection that is part of an alliance with Polo Ralph Lauren Corp. The collection is the biggest brand launch in Penney's history.

Ullman told investors that the back-to-school launches had "good initial customer response." But the company is working with Polo Ralph Lauren to lower price on some American Living items that didn't fare well.