Mid-tier looking for high ground as economy wanes

NATIONWIDE RT REPORT—With a 21% gas price jump and a 5% increase in food and beverage prices since last year, it’s not surprising that the price influx is affecting the mid-tier marketplace.

Sears Holdings reported a $56 million net loss for its first quarter ended May 3—a prominent drop compared with net income of $223 million for the first quarter ended May 5, 2007. Total domestic comp-store sales declined 8.6% across most major categories, especially in home appliance, lawn and garden and apparel. Sears reported a comparable-store sales decline of 9.8%, while Kmart’s comparable-store sales dipped by 7.1%.

Numbers are not exactly gleaming at JCPenney either. The company reported net income of $120 million, a 49.6% loss for its first quarter ended May 3. Comp-store sales decreased 7.4%, due in part to soft sales in home and fine jewelry. And Kohl’s reported a net income of $153 million for the first quarter ended May 3, which dropped from last year’s $209 million. Its comps for the quarter decreased by 6.7%.

“The negative comp trends for moderate department stores has been largely related to declining traffic nationally,” said Jeff Klinefelter, senior research analyst for Piper Jaffray & Co. “In terms of attempting to correct the negative comp trends, you need traffic to improve, you need consumer confidence to improve and you also need disposable income to improve. There is a significant portion of the comp decline that’s outside of the retailer’s control.”

Clearly, shopping has taken a backseat. “In a tough economic situation every customer is looking for a bargain and they are trying to switch to discounters,” said Hemant Sangwan, a consultant with Global Insight (Canada) Limited. To combat the economic pitfalls, Sangwan recommends focusing on the demand story—attracting customers with sale programs and extended payment options—and the supply story, which suggests additional cost-cutting efforts.

One thing to note, however, is that deep discounting may hurt margins. Sears Holdings’ gross margin rate dropped about 90 basis points to 27.3% as a result of increased promotional and incremental markdowns taken to clear merchandise. The trick is to offer value pricing in high-profile product categories. “When the weather changes, you need to know that your pricing is very sharp on seasonal categories,” said Klinefelter.

If current conditions persist, Sears plans to pay more attention to inventories to better align current levels with expected sales. Marketing costs are also expected to decrease for the remainder of fiscal 2008. “Our first-quarter results reflect the difficult economic environment and intense competition for consumer business,” said W. Bruce Johnson, Sears Holdings’ interim ceo and president. “[As a result], we are managing costs [and] will continue to invest in our future by hiring talented leaders and [by] improving our online and multichannel capabilities.”

JCPenney also plans to scrutinize its inventory levels. “Looking ahead, we will continue to take the necessary actions to align our business plans with the expectation that conditions will remain difficult for the remainder of 2008,” said JCPenney chairman and ceo Mike Ullman. “Accordingly, inventory will be managed through appropriate pricing actions on existing merchandise and by reducing our future merchandise commitments to better balance our inventory position with expected sales levels.”

Kohl’s, on the other hand, is approaching this year by concentrating on the future and growth. “We will continue to invest for the long term as we add new stores and remodel existing stores, as well as invest in people and technology for market share gain,” said Larry Montgomery, Kohl’s chairman and ceo.