Discounts May Hurt Retailers' Profits

Nov. 28 may fall only once on the calendar, but Cyber Monday came twice this year at J.C. Penney (JCP) and Sears Holdings (SHLD) —once on the day after Thanksgiving weekend and again a week later. Ditto for Black Friday at New York’s J&R Electronics. And Target (TGT) on Dec. 8 began its “Almost Last Minute Sale”—even though Christmas was weeks away. These revisions to the holiday calendar, and the discounting that accompanies each tweak, show just how determined retailers are to keep the attention of consumers this Christmas season.

Typically, stores let up on the deals after Thanksgiving weekend. Yet amid worries about lingering unemployment and the health of the economy, retailers this year are continuing to roll out discounts. That’s likely to hammer profit margins, especially for merchants facing higher labor and raw material costs. To see big promotions after Black Friday “is a bit alarming,” says Poonam Goyal, a Bloomberg Industries analyst. “Investors expected margins to be down due to inflation, but they didn’t expect margins to be down from more promotions.”

Merchants are now smack in the middle of the traditional spending lull between Black Friday weekend and the final days before Christmas. This year’s interval comes after retailers posted record Black Friday weekend sales of $52.4 billion, according to the National Retail Federation. Year-over-year sales in November increased 3.2 percent, beating forecasts.

To get those results, retailers began offering holiday promotions earlier than usual. Some Black Friday deals arrived a month before the actual day, and marketing ploys such as Black Friday Week and even Black November proved popular. “It’s a crazy time right now, with retailers willing to do anything,” says David L. Bassuk, head of the global retail practice at consultant AlixPartners. He says these nonstop promotions make December profits “highly questionable” since consumers usually flock to the items on sale. Best Buy (BBY), for example, on Dec. 13 said that earnings for its fiscal third quarter (ended Nov. 26) fell 29 percent due in part to Black Friday discounting. Its stock price then plunged 15 percent.

Industrywide, store traffic in the first week of December declined 5.9 percent from a year earlier, reported ShopperTrak. If more shoppers don’t return to stores, retailers may have to cut prices more than they’d planned, squeezing margins, says Goyal. That already began happening in the third quarter. Average gross margin, or share of sales left after deducting the cost of goods sold, for 43 retailers in the Standard & Poor’s 500-stock index, fell to 32.2 percent from 33.1 percent a year ago, according to data compiled by Bloomberg.

Apparel chains may be especially vulnerable because the clothes they’re selling now were purchased earlier in the year when cotton prices were at record highs. Third-quarter gross margins declined more than three percentage points at Abercrombie & Fitch (ANF), Gap (GPS), Urban Outfitters (URBN), and Chico’s FAS (CHS). And unseasonably warm weather has forced retailers to mark down winter clothing—potentially another hit to margins, says Ken Stumphauzer, a retail analyst at Sterne Agee. That only increases the need for retailers to lure more shoppers. And nothing draws them in like discounts.

Sensex 16,000 again

Key benchmark indices regained strength in afternoon trade after seeing volatility in early afternoon trade as the Reserve Bank of India (RBI) after a monetary policy review today, 16 December 2011, said that its future policy action will likely reverse the monetary-tightening cycle due to the risks to growth. Index heavyweight Reliance Industries (RIL) edged higher in volatile trade. Bharti Airtel, ITC, Infosys and ICICI Bank also moved higher. The barometer index, BSE Sensex, was currently above the psychological 16,000 level, having alternately moved above and below that mark during the day.

The Sensex was up 187.91 points or 1.19%, off close to 29 points from the day's high and up about 158 points from the day's low. The market breadth was positive. Except BSE Capital Goods index, all the other 12 sectoral indices on BSE were in green. Mid-cap and small-cap indices on BSE underperformed the Sensex.

The market opened on a firm note as Asian stocks rose. The Sensex trimmed gains after hitting fresh intraday high in morning trade. The barometer index, BSE Sensex, alternately moved above and below the psychological 16,000 level in mid-morning trade. A bout of volatility was witnessed in early afternoon trade as key benchmark indices regained strength after paring gains from intraday highs after the Reserve Bank of India (RBI) left its key lending rate unchanged. The RBI announced the decision at about 12:00 IST. The market regained strength in afternoon trade.

The RBI on Friday left its main lending rate unchanged in order to support faltering economic growth as inflation shows signs of cooling. The central bank also refrained from cutting the cash reserve ratio (CRR) despite tight liquidity in the system. The repo rate has been left steady at 8.5% after increasing it 13 times since March 2010. The bank rate also remains static at 6%. The central bank kept its end-March 2012 inflation forecast unchanged at 7%.

While inflation remains on its projected trajectory, downside risks to growth have clearly increased, RBI said in a statement. The guidance given in the second quarter review of the monetary policy was that, based on the projected inflation trajectory, further rate hikes might not be warranted. In view of the moderating growth momentum and higher downside risks to growth, this guidance is being reiterated, RBI said. From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth, RBI said.

However, it must be emphasised that inflation risks remain high and inflation could quickly recur as a result of both supply and demand forces, the central bank said in statement. Also, the rupee remains under stress, RBI said. The timing and magnitude of further actions will depend on a continuing assessment of how these factors shape up in the months ahead, RBI said. The RBI has raised rates 13 times since March 2010.

RBI said there are currently no significant signs of stress in the money market. However, in view of the fact that borrowings from the LAF are persistently above the Reserve Bank of India's comfort zone, further open market operations (OMOs) will be conducted as and when seen to be appropriate, RBI said.

At 13:15 IST, the BSE Sensex was up 187.91 points or 1.19% to 16,024.38. The index jumped 217.17 points at the day's high of 16,053.64 in early afternoon trade, its highest level since 14 December 2011. The index rose 30.16 points at the day's low of 15,866.63 in early trade.

The S&P CNX Nifty was up 52.40 points or 1.1% to 4,798.75. The index hit a hit a high of 4,815.75 in intraday trade, its highest level since 14 December 2011. The Nifty hit a low of 4,752.50 in intraday trade.

The BSE Mid-Cap index was up 0.68% and the BSE Small-Cap index was up 0.63%. Both these indices underperformed the Sensex.

The market breadth, indicating the overall health of the market, was positive. On BSE, 1,459 shares rose and 1,020 shares fell. A total of 109 shares were unchanged.

From the 30-member Sensex pack, 24 stocks rose and the rest of them fell. Tata Motors (up 3.79%), ONGC (up 2.59%), Mahindra & Mahindra (up 2.57%), Bajaj Auto (up 2.36%), Hindalco Industries (up 2.20%), Tata Power Company (up 1.99%), Cipla (up 1.96%) and DLF (up 1.80%), edged higher from the Sensex pack. TCS (down 1.32%), Larsen & Toubro (down 0.82%), Wipro (down 0.22%), Sun Pharmaceuticals Industries (down 0.05%) and State Bank of India (down 0.04%), edged lower from the Sensex pack.

Shares of Bharti Airtel rose 3.71% on back of RBI's moves to curb volatility in the rupee, which in turn will help reduce losses on its foreign debt and exposure.

India's largest cigarette maker by sales ITC rose 1.5% to Rs 202.55.

India's second largest IT company by sales Infosys rose 1.66% to Rs 2760.25.

Index heavyweight Reliance Industries (RIL) rose 1.43% to Rs 759.40. The stock was volatile. The stock hit a high of Rs 760 and a low of Rs 745. The company's advance tax payment reportedly fell 15.79% to Rs 1002 crore in Q3 December 2011 over Q3 December 2010. Oil minister Jaipal Reddy said in a written reply in the lower house of parliament on Thursday, 15 December 2011, that the decline in gas output from RIL's east coast block is due to the company drilling fewer number of wells than promised and stoppage of production at six wells.

RIL late last month said that it has initiated arbitration proceedings against the government to seek an independent view of a tribunal on the issue of the company's entitlement of recovery of entire costs on KG-D6 gas blocks from the revenue generated from the blocks. RIL said it has initiated arbitration proceedings against the Government of India (GoI) in a bid to finally resolve the cost recovery issue so as not to hinder future investments in this block.

RIL said its investment in KG-D6 production facilities has been only partly recovered and the return on the investment so far is less than the cost of the capital. The production sharing contract (PSC) with the Government of India (GoI) contains no provision which entitles the GoI to restrict the costs recovered by the company by reference to factors such as the level of production or the extent to which field facilities are utilised, RIL said.

India's largest private sector bank by net profit, ICICI Bank rose 1.21% to Rs 706.70. The stock had hit a 52-week low of Rs 688.95 on Thursday, 15 December 2011. The bank's advance tax reportedly remained flat at Rs 450 crore in Q3 December 2011.

Top gainers in the BSE Mid-Cap index were, Apollo Hospitals Enterprise (up 9.37%), HMT (up 8.80%), Cox & Kings (up 7.88%), Electrosteel Steels (up 7.09%) and Bombay Rayon Fashions (up 5.16%).

Top gainers in the BSE Small-Cap index were, Unichem Laboratories (up 16.57%), Spanco (up 13.56%), Lloyds Metals & Engineers (up 8.89%), Inox Leisure (up 8.36%) and Astral Poly Technik (up 6.56%).

Foreign institutional investors (FIIs) sold shares worth Rs 323.28 crore on Thursday, 15 December 2011, as per the provisional data from the stock exchanges. FII outflow totaled Rs 1701.09 crore in five trading sessions from 9 to 15 December 2011, as per provisional data from the stock exchanges. The recent outflow followed sustained inflow early this month.

As per reports, advance taxes for the third quarter from corporates headquartered in Mumbai has risen 10%. Cements and pharma companies have reported surge in advance tax payment for the third quarter. Advance taxes are collected in four installments -- 15% by 15 June; 40% by 15 September; 75% by 15 December and 100% by 15 March.

Credit rating agency Moody's Investors Service on Wednesday, 14 December 2011, said that the sharp decline in the value of the Indian rupee against the dollar is generally exerting only a moderate impact on rated Indian companies. Risks for companies holding large amounts of dollar denominated debt are also manageable in the near term, given that debt maturities are limited for this time frame, Moody's said in a new report. This means Indian companies rated by Moody's do not have a significant dollar outflow at a time when the Indian rupee is losing ground. Moody's latest assessment comes as the rupee continued its free fall against the dollar on Thursday, 15 December 2011, sinking to a new record low for the fourth straight day, as investors fled risk-sensitive currencies due to escalating concerns over Europe's sovereign debt crisis.

The Reserve Bank of India (RBI) took steps on Thursday to arrest the free-fall of the rupee after the local currency hit a new record low against the dollar for the fourth consecutive day. The new currency rules include reducing the net amount of US dollar-versus-rupee trade that authorized foreign-exchange dealers can hold on their books. Another measure of the bank's new rules would limit the amount of currency hedging by importers, who typically buy dollars.

A government statement in parliament last month dashed hopes of a relief in securities transaction tax (STT). Junior finance minister S.S. Palanimanickam has said that the government has no proposal to lower the securities transaction tax (STT). There has been a speculation that the government will reduce STT in Union Budget 2012-2013 in a bid to revive sagging volumes on the bourses. Palanimanickam said in a written reply to Rajya Sabha that the securities transaction tax receipts had declined by around 18% to Rs 2960 crore during the first six months in the current fiscal year from a year ago period.

The government last week said that the Rs 40000-crore stakes sale target in state-run companies would be hard to achieve this fiscal year, while tax receipts would suffer from the impact of the global slowdown.

Asian shares edged higher on Friday, 16 December 2011, as signs of strength in the US economy temporarily broke through gloom over the European debt crisis that had driven a sell-off in riskier assets over the past three days. Key benchmark indices in China, Hong Kong, Indonesia, Japan, Taiwan, Singapore and South Korea rose by between 0.30% to 2.02%.

Trading in US index futures indicated that the Dow could gain 81 points at the opening bell on Friday, 16 December 2011. US stocks rose modestly on Thursday, after a fall in US unemployment, a stronger-than-expected rise in regional factory activity and better-than-forecast results from FedEx Corp painted an improving picture of the economy. Jobless claims in the US dropped to a three and a half year low last week.

Fitch Ratings, the third-biggest of the major credit rating agencies, has downgraded seven global banks based in Europe and the United States, citing increased challenges in the financial markets. Bank of America Corp., Goldman Sachs and Citigroup had their credit grades cut by Fitch. Barclays, Credit Suisse, Deutsche Bank and BNP Paribas also had their ratings lowered by Fitch.

Business conditions improve

AUSTRALIAN business conditions nudged higher last month as a cut in interest rates helped shore up the economy against growing concerns about the outlook for Europe, National Australia Bank said today.

The bank's business conditions index rose 1 point to +1 points in November from October and the business confidence index was unchanged at +2 points over the same period. 

"Given that we have seen some slowing in global activity data, especially in Europe, the uptick in conditions in the month is perhaps more favourable than might have been expected," the bank said. 

The Reserve Bank of Australia cut interest rates at the start of last month, and then backed it up with a second cut this month. The central bank has warned the European debt crisis is beginning to be felt in Asia, a region crucial for Australia's exports. 

Financial markets expect the RBA to continue cutting interest rates in early 2012 as eurozone policy makers continue to scratch for answers to the region's debt crisis. 

"The continuing financial crisis in the eurozone is seriously damaging European business confidence and affecting economic activity. As a result, we are now expecting a deeper recession in that region with spill-over effects around the world," National Australia Bank said. 

NAB cut its forecast for world growth to 3.25 per cent for 2012 saying the big emerging market economies like China, India and Brazil are slowing as earlier policy tightening takes effect. 

Still, Australia's economy is a standout, with the Organization for Economic Cooperation and Development saying recently it will be among the fastest growing developed nations in 2012. 

NAB said the survey results are consistent with Australia growing at or around its historic averages, with improvement in November recorded in forward order, stocks, employment and capacity utilisation. 

Data last week showed the economy grew strongly in the third quarter thanks largely to a mining investment boom. Annualised, the economy grew by 3.9 per cent in the quarter. 

"Australian national accounts data heralded the start of the long-awaited mining investment boom, while consumption growth remains firm," NAB said. 

NAB expects Australia's commodity-rich economy to grow in year average terms by 4.5 per cent in 2012, accelerating from 2.1 per cent in 2011.