June Sales Demonstrate How Strategy Evolves from Necessity at Macy's, Penney

While some pundits point to June retail sales figures as evidence that the economy remains on the skids, something else is going on they’re not taking into consideration.

Retailers are making a decision not to sacrifice profits to revenues, curtailing promotional sales events, scaling back slow moving inventory and even accepting out of stocks in some cases – or, in the parlance, leaving money on the table – rather than having to endure 70 percent off clearance sales on inventory that doesn’t move in a timely fashion.

Among those who have caught on to the trend, consultant Bob Gordman, president of the Gordman Group stated, in reviewing recent sales:

During this June/July period, it will be difficult in some cases to tell if softer sales reflect a change in trend or a change in strategy. Retailers like Macy’s, Kohl’s, J.C. Penney, and Nordstrom have dramatically reduced their inventories and appear to be accepting lower sales with the benefit of less risk.

What Gordman has observed, he told Bnet, is that some retailers are using the recession to get out of destructive operating patterns. The decision to cut costs by limiting the number of items and depth of inventory committed to store distribution began as a reaction to the economic environment but is turning into something else. In the example of Macy’s, refusing to drive comparable store sales at the expense of profits – or at the cost of greater losses – started as a desire to hold on to cash but evolved into a happy retreat from annual price slashing around specific promotional events. Gordman noted:

I think what you are seeing now if you look at earnings coming out of Macy’s or Penney is, they were caught in a terrible spiral that, in order to show comparable store sales gains, they had to anniversary some of the excessive promotions they had done the previous year, which had become annual events. They were trapped because they had to show the stock market the comps. Now they have a great way to exit the trap, and I think you are seeing that with Macy’s, Penney and Kohl’s to a degree. Companies known for excessive promotions are repositioning their businesses.

Wall Street has rewarded some retailers for boosting earnings at the expense of comparable store sales although not all. For example, Target’s share price rose yesterday after the company stated that its second-quarter earnings should meet or exceed an analyst average estimate of 64 cents a share even though its comp store sales declined more steeply, at 6.2 percent, than the 5.6 percent predicted by Thompson Reuters.

J.C. Penney posted an 8.2 percent decrease in comparable store sales but upgraded its second-quarter guidance to a loss in the eight to 12 cents per share range from a loss between 15 cents and 25 cents a share as previously stated. Still, the share price declined.

Ironically, J.C. Penney beat the Thomson Reuter’s prediction of a 9.3 percent comp decline.