CFOs Look to Black Friday with One Eye Open

With the up-front decisions made for the holiday season, retail finance chiefs have low expectations but also can't ignore the hype.

As CFO of Gymboree, Blair Lambert won’t be obsessing over the clothing retailer’s Black Friday sales figures. In terms of his day-to-day focus, he’s already moved on to 2010.

“At this point, our strategies have been well defined,” he told CFO.com. “We have laid out our backup strategies if sales don’t go as planned. We’re methodical about that, and frankly I’m spending more time on our strategies for next year and the year after that.”

To be sure, he added, the company aims to be profitable year-round, not just during the fourth quarter. Still, that’s not to say he won’t be paying attention. “I wouldn’t say, as CFO, that I focus on Christmas per se,” he said. “But I’m as excited as everyone else in the industry because of the volume that comes in.”

We may be on the brink of the most wonderful time of the year, but it’s also a particularly uncertain time for the retail industry. One of the hardest-hit sectors in the economic downturn, it experienced a 2.8% drop in sales last November and December over the previous year, the first decline in holiday sales since the National Retail Federation began tracking the numbers in 1995. The trade association predicts the sector will see a further 1% decline this season. Finance executives are similarly pessimistic, frequently citing the 10% national unemployment rate as a reason why customers won’t trigger a recovery any time soon, never mind on the busiest sales day of the year.

In the meantime, CFOs have had to adjust their forecasts in a volatile marketplace, as customers are more conscious about prices and more demanding of deep discounts. By this time, the CFOs already have contingency plans in place if certain sales targets aren’t met as the season wears on, in the form of further markdowns or special promotions.

It’s unclear whether consumers’ overly cautious behavior is permanent or will lift when the economy significantly improves, but Gymboree isn’t taking chances. The company recently “retooled itself,” said Lambert, by assuming the current state of consumer spending won’t abate anytime soon. With that belief in mind, the company has rethought how it staffs the nearly 1,000 stores of its three brands (Gymboree, Janie and Jack, and Crazy 8), improved customer service, and lowered its expenses. “For the most part, we think this will continue to be a challenging environment, which we will approach as the new normal,” said Lambert.

Gymboree, like most retailers, has also lowered its inventory levels in response to the change in customer spending during the past year. On the flip side, shrunken inventories present the risk of leaving money on the table if consumers actually end up spending more than expected. The day after Thanksgiving will confirm whether companies have properly managed their inventory levels. “So far there are no signs that retailers are budging on inventory,” Chris Kuehl, economic analyst for the National Association of Credit Management, told CFO.com. “They’re still taking the position that they’d rather not make money than get stuck with inventory.”

While finance executives are hoping the decisions made several months ago on their current stock levels will prove to be prescient, they are also tempering expectations. In earnings calls for their third-quarter results, retail CFOs appeared to be trying to discourage high hopes for observers who may have thought improvements in the overall economy would affect their business in the short term. “While we continue to believe that it’s possible for us to deliver positive same-store sales in the fourth quarter,” said Target CFO Doug Scovanner during a recent conference call, “we think it’s more prudent to plan for a modest negative result in this key metric, and we’ve positioned our markdown-sensitive inventory commitments with this in mind.”

Instead, finance chiefs are directing attention to another metric: gross margin rates. Lambert keeps weekly tabs on the measurement with his company’s planners, who make decisions about how much to buy of each product, and allocators, who determine how the products will be dispersed between stores.

Macy’s, for one, believes its lower inventory levels will widen gross margins. For example, the big retailer entered the fourth quarter with its inventory down 7.4% from last year, and it has seen a recent uptick in its sales. It reported a “better than expected” gross margin rate of 40.2% for the third quarter, or 70 basis points higher than last year, noted CFO Karen Hoguet during a recent conference call with analysts.

Still, she cautioned investors against undue optimism for the fourth quarter. “There is more uncertainty than usual in the environment,” she said. “We, like you, are trying hard to forecast what this environment will mean for holiday sales and profitability. It isn’t easy. Unfortunately, we all are just going to have to wait and see.”

 

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