Retail Earnings, Sales Tallies Hint at Mildly Merry Christmas for Stores The third-quarter earnings season got off to a mildly optimistic start for retailers, with department stores expecting the colder weather will heat up holiday sales, even as shoppers continue to seek cheap deals and generally hold back on spending. And Monday's release of the Commerce Department's retail sales tally is expected to boost hopes for the holiday shopping season.

Macy's (M), J.C. Penney (JCP) and Kohl's (KSS) reported shoppers are coming out to stores, but their spending is still very measured, which is putting pressure on the retailers' profits. Even Macy's, which beat expectations and upgraded its guidance for the rest of the year, admitted it has to be "thoughtful about pricing decisions," according to CFO Karen Hoguet.

The parent of Bloomingdale's posted earnings of 2 cents per share during the quarter, better than the eight-cent loss it had last year, and comparable sales (for stores open a year) were up 3.9%. It raised its guidance for the second half to $1.50 to $1.55 in earnings per share, from $1.45 to $1.50 and $1.94 to $1.99 for the full year from $1.89 to $1.94.

Many retailers have noticed their sales growth this year has come from an increase in the number of shoppers, who are spending less per shopping trip. Kevin Mansell, CEO of Kohl's, said he expects that trend to continue during the fourth quarter and into next year. Kohl's, which has shown consistent sales growth this year, posted net income of 63 cents per share in third quarter, flat from a year ago, and 1.8% growth in comparable sales; CFO Wes McDonald noted an 8.3% increase in traffic was offset by a drop of 6.5% in the average transaction value.

"We knew the consumer was not going to help us much this year," said Penney CEO Mike Ullman. "We had to create our own growth." Initiatives such as new Liz Claiborne and MNG by Mango lines helped the department store post third-quarter net income of 19 cents per share, up from 11 cents last year, and comparable sales growth of 1.9%.

Units sold per transaction are up and the number of units sold is up, but customers are opting for items that are "more sharply priced," said CFO Bob Cavanaugh. That's why Penney has adjusted its selection to focus more on attracting shoppers with items in the "good" and "better " range, rather than higher-priced "best" purchases, said Ullman.

Year-Over-Year Sales Growth Strongest Since April

Department stores, the middle tier of retail, have been affected by the downturn more than either luxury or discount retailers, and are still feeling the effects amid the lukewarm recovery. But October sales numbers are encouraging for the whole of retail, showing shopper momentum going into the stretch from Thanksgiving to Christmas Day, when retailers make the bulk of the year's profits.

Retail sales excluding automobiles grew 3.3% in October, according to the tallies from MasterCard Advisors SpendingPulse. The tally, which tracks sales by credit card and other payment types, tends to closely predict the Commerce Department figures, due out Monday. Those totals are the most accurate picture of consumer spending, since they include gas and auto sales, as well as the figures of retailers who don't report publicly their monthly tallies, such as Walmart Stores (WMT).

The numbers are the strongest year-over-year growth seen since April, when sales dropped into a "summer lull," said Kamalesh Rao, director of economic research for MasterCard Advisors SpendingPulse. The figures are also more than double the growth rate in September, which shows momentum, he said.

Expect Lots of Deals, Promotions

And shoppers are doing more discretionary spending, rather than just buying necessities and replacing worn items, said Rao. He noted that segments such as restaurants and electronics are also showing improvement.

"We're seeing an across-the-board rebound in discretionary spending," he said. For sectors such as apparel to post increases, all shopper segments have to be spending, not just wealthy consumers, said Rao.

"It's hard to move those sectors unless a lot of people are buying," he said.

But as the retailers noted, the shoppers are picking and choosing purchases carefully. The department stores all said they expect promotions will be as widespread as last year. The environment has been very promotional for a while, said Kohl's Mansell.

However, nobody is expecting wild markdowns like those seen in 2008, when stores were overstocked as the recession hit.

"I don't think we will experience irrational behavior," said Ullman. "I suspect that there won't be any big surprises."

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