Markdown Christmas

Christmas 2004 is being called the season of the last-minute markdown.

According to a report in The New York Times, merchants, led by Wal-Mart Stores, scrambled to cut prices both before and after Dec. 25, 2004, “in many cases choosing sales gains over higher profits.”

Wal-Mart has announced that it ended the year ahead of its most recent sales forecast, in part because it began lowering some prices immediately after a lackluster Thanksgiving weekend. Looking ahead to Christmas, and not liking what they saw, said The Times, Wal-Mart executives in late November marked down 24 of the store’s most popular toys and electronics to generate traffic. Instead of the 2 percent gain in December sales that Wal-Mart had forecast last week, the retail giant now says the figure was closer to 3 percent. Wal-Mart executives said the increase was the result of higher-than-expected sales in the week after Christmas, many of which came from customers using gift cards.

The Times reported that many department store and specialty store organizations, fearing the popular prediction of mediocre sales, sharply marked down merchandise — particularly clothes — in the week before and after Christmas. The strategy brought a surge in traffic for many stores, but The Times quoted analysts who said they were concerned that so many markdowns might hurt profits.

“We saw some of the most excessive markdowns at stores, including Ann Taylor, the Gap and the Limited’s Express division,” said Mark Friedman, a first vice president at Merrill Lynch who covers retail stocks. Asked if he was concerned about the level of markdowns, he said, “Yes, we think there will be more earnings pressure,” which may mean lower earnings.

Eric Beder, senior analyst with JB Hanauer, said he was “very wary” about the discount department store sector — merchants like Target and Big Lots — especially now that higher energy prices “are here to stay.”

And Todd Slater, director for retail research at Lazard, said the surge in traffic came too late for many merchants and it would be difficult for some retailers to meet profit forecasts. He predicted sales declines for most department stores, except for the high-end stores like Neiman Marcus.

Many analysts said there would likely be some winners, such as Abercrombie & Fitch, which held off promotions until later than many other chains; Aéropostale, which “managed to inject enough fresh product — new, full-price spring fashions — to make analysts expect its sales to jump into the mid-single digits for December”; and American Eagle Outfitters.

For continuing reports on how various retailers performed over the holiday season, watch for the Retail Financial Reports channel on this web page.