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Tuesday, December 26, 2006
Fuzzy Math
Retail analysts still trying to put lipstick on a pig:
With the 2006 pre-Christmas season falling short of sales expectations for many merchants, the retail industry hoped that shoppers, armed with gift cards, would spend freely in the weeks ahead on discounted items as well as full-priced merchandise. That would boost business in December and in the fourth-quarter.
Federated Department Stores Inc.’s Macy’s opened its doors at 7 a.m. and offered discounts ranging from 50 percent to 75 percent. Toys “R” Us Inc. offered 50 percent discounts on selected toys. The toy seller was also showcasing hot toys from 2007 in its stores.
[...]
Based on data released late Sunday by ShopperTrak RCT Corp., sales for both Friday and Saturday generated a combined $16.2 billion, with Saturday’s business totaling $8.72 billion. But Bill Martin, co-founder of ShopperTrak, said he had expected the finale to be stronger; because it wasn’t, stores need a good post-Christmas season to meet ShopperTrak’s 5 percent holiday forecast.
The post-Christmas season has become more important with the increasing popularity of gift cards. Gift card sales are only recorded on retailers’ balance sheet when cards are redeemed. As I have pointed out before, anyone can increase their same stores sales or inflate their monthly sales by slashing prices and sacrificing margin (which also increases cash flow). But at the end of the day, sales margin dictates whether you're actually making money. A $100 gift card spent on merchandise that is discounted 50% (cost of goods in most cases such as apparel) means that the retailer is absorbing all of the costs of running their business since there is no profit in the sale. That is a recipe for disaster.
Based upon the amount of excess merchandise that I saw in some stores on 12/24, this was a horrible retail season and profitability* in most sectors is going to be ugly.
*There are exceptions, based upon the merchandise categories, when it comes to mark-up. Apparel...50% margin ($20 cost = $40 retail). Footwear...45% margin. Make-up on the other hand has an outrageous mark-up. I used to have a house brand make-up made where some units cost me $2.10 and I sold them for $39.
Yeah. I'm going to hell for that one.
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