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Retailers wave the warning flags

Wal-Mart says its shoppers are concerned about their finances; Nordstrom, one of the better-performing retailers, warns on its third quarter and misses sales forecast.

By Parija B. Kavilanz, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- A slew of earnings warnings from retailers Thursday, on top of poor September sales numbers, added credence to concerns that consumers are feeling tapped out and that retailers are headed for a difficult holiday period.

"Retailers really struggled last month because of slow sales and also because of the warm weather drag," said Ken Perkins, president of Retail Metrics.

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Warmer-than-usual September and early-October temperatures around the nation were blamed by some retailers for disappointing sales.

High-end seller Nordstrom, which has been one of the best-performing retailers, said Thursday that sales at its stores open at least a year - a key measure of retail performance known as same-store sales - rose 3.2 percent, missing analysts' forecasts for a 5 percent increase.

What's more, the retailer cut its third-quarter profit guidance to between 50 and 53 cents a share, much lower than its prior outlook of 61 to 64 cents a share.

Nordstrom said it struggled with much higher inventory levels than it had planned for, a possible sign that its shoppers bought less.

Other retailers also warned on their third quarter. Limited Brands (Charts, Fortune 500), parent of the Victoria's Secret and Bath & Body Works chains, posted a 4 percent drop in its same-store sales last month and warned that it now expects third-quarter earnings of between 0 and 4 cents a share, from its guidance of 4 cents a share.

Women's apparel chain Chico's (Charts) said its September sales tumbled 8.3 percent, while teen seller American Eagle Outfitters (Charts) reported a 2 percent decline in same-store sales.

American Eagle also warned that it expects third-quarter earnings to come in between 44 and 45 cents a share, compared to its previous forecast of 47 to 48 cents a share.

Perkins said the weakness in last month's sales doesn't bode well for the holiday shopping season.

Holiday gift buying in November and December is crucial for retailers because the two months account for as much as 50 percent of merchants' annual profits and sales.

Moreover, a soft holiday season would add legitimacy to ongoing concerns that a consumer slowdown is in the works. This is especially troubling because consumer spending fuels two-thirds of the nation's economy

"It's certainly not going to be a rosy holiday for retailers," Perkins said. "While wage growth and employment growth are holding steady, it has become much harder for low- and mid-income consumers to get a mortgage or to extract money from their homes. Food prices are up and credit standards have tightened. Overall, people have less money to shop."

The National Retail Federation estimates that holiday sales this year will increase 4 percent, softer than last year's 4.6 percent gain.

Wal-Mart, the world's largest retailer posted same-store sales that rose 1.4 percent last month, at the low end of its forecast for a 1 to 3 percent increase.

In a statement, the retailer said its grocery and pharmacy products were the strongest drivers of last month's sales, but apparel and home-related goods remained soft.

Wal-Mart: Customers remain concerned

Wal-Mart (Charts, Fortune 500) said its research showed that "customers remain concerned about their finances, especially the cost of living." Additionally, the company said that unseasonably warmer weather in much of the country, coupled with tighter consumer spending, hurt key seasonal categories.

Although Wal-Mart raised its third-quarter earnings forecast to between 66 and 69 cents a share from its earlier guidance of 62 to 65 cents a share, the company attributed the upward revision to improvements in cost reductions and not because of any pick up in sales.

Still, investors cheered the news, sending Wal-Mart shares up more than 3 percent in afternoon trading.

"For the first two months of the quarter, we have seen improvement in initial margin and expense leverage at the Wal-Mart Stores division, which is driving this change," Wal-Mart's chief financial officer Tom Schoewe, said in a statement.

For October, Wal-Mart expects same-store sales to be flat to up 2 percent.

Thomson Financial, which compares sales at 45 retail chains, said September same-store sales overall rose a much weaker 1.4 percent compared to its forecast for a 2.1 percent increase, making it the weakest monthly same-store sales gain for the group since August 2004.

For September, the firm said 39 percent of retailers beat sales estimates, while 61 percent missed analysts' forecasts.

Mother Nature also dealt a blow to retailers. A prolonged period of summer-like temperatures hurt sales of cold-weather clothing in particular.

Sales at Gap Inc (Charts, Fortune 500)., the No. 1 apparel seller, slumped 7 percent and Hot Topic's sales fell 2.9 percent.

Wal-Mart rival Target (Charts, Fortune 500) also another casualty of last month's weakness. It reported a 1.2 percent increase in same-store sales, below its already lowered sales guidance.

Target cut its September sales guidance to an increase of between 1.5 percent and 2.5 percent from its earlier forecast of a 4 to 6 percent gain.

The retailer warned on its full-year, saying earnings will be below $3.60 a share from the company's previous guidance of slightly more or slightly less than $3.60 for the year.

Heavy discounting in October

Stephen Hoch, director of Wharton Business School's Jay H. Baker division of retailing, expects some retailers to resort to very heavy discounting this month in order to clear out September's unsold merchandise.

"Retailers' inventories are clogged up right now because the warm weather hurt demand for winter clothing," he said. "In order to bring out their holiday merchandise, stores will have to sell the backlog.

"Right now retailers are sitting on their heels. But they have to do something quickly to juice things up," Hoch said." He said he expects retailers to do a lot of discounting in October - "this will be great for consumers overall."

Retailers will benefit, too. Sales will rebound in time for the holidays, Hoch said.

"While it's true that Middle America has felt the biggest squeeze from energy prices and housing pressures, incomes are still growing and there's still readily available credit that will continue to support consumer spending."

On Friday, the government will deliver its monthly update on the retail sector. According to economists surveyed by Briefing.com, total retail sales are expected to have increased 0.2 percent in September, while retail sales excluding the volatile automobile sector are forecast to rise 0.3 percent.

Toy shortages expected for holidays Top of page

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