After a sluggish September, retailers cut profit forecasts

NEW YORK - With disappointing September sales behind them, the nation's retailers are now left with a big mess: piles of cashmere sweaters, coats, and other heavy fall items that have been languishing on their shelves because of the steamy weather.

For many merchants who need to quickly mark down fall leftovers to make room for holiday goods, the bloated inventories are a big profit problem.

For shoppers, they mean generous discounts.

Yesterday, a string of retailers including Target Corp., J.C. Penney Co., Limited Brands Inc., and Nordstrom Inc. cut their earnings outlooks. Wal-Mart Stores Inc. was almost alone in raising its third-quarter profit projection, but that wasn't because of robust sales: It was because of expense-cutting.

"The question becomes who has too much inventory," said John Morris, managing director of Wachovia Securities, "And how does that impact holiday sales?" The inventory problem, he said, has forced some retailers to try to cut holiday orders. It may be too late. "The discounting is starting to spread," he said.

Morris estimates that discounting was up 5 percent in September compared with a year ago at the apparel chains he tracks.

Warm weather discouraged shoppers from buying fall clothes, but sales reports also showed that consumers continue to be weighed down by higher energy prices, a slumping housing market, and tightening credit.

Chris Donnelly, a partner in the retail practice at consulting group Accenture, noted that earnings warnings from retailers mean that stores realized they're not going to make their sales targets without heavy discounting.

"They are starting to see that this [holiday] season is going to be very promotional," Donnelly said.

The good news is that the job market has held up fairly well despite widening housing and credit problems. Job security is a key factor in consumers' willingness to spend. Yesterday, the Labor Department said the number of newly laid off workers filing claims for unemployment benefits fell by 12,000 last week to 308,000.