Retailers must end consumer addiction to discounts

Retail stocks took a hit Thursday as the holiday picture came more into focus, with signs increasingly pointing toward a lackluster season of deep discounts and low traffic.

Although experts said 2014 should offer some relief to consumers' pocketbooks, as the broader economy continues to strengthen, retailers' big challenge will be to find a way to attract customers without giving away the store, as many did this holiday.

"What worked before isn't going to work into the future to drive business during the holidays," said Alison Paul, vice chairman and U.S. Retail & Distribution leader at Deloitte. "You can't cut your way to growth."

Retailer Gap reported same-store sales in the key November and December months rose 1 percent, but predicted its full-year earnings would come in near the high end of its previously announced range of $2.57 to $2.65 per share. That would miss analysts' expectations.

Also on Thursday after the markets closed, teen retailer Abercrombie & Fitch saw its shares jump more than 13 percent in extended trading after the company raised its full-year guidance. (See what the company's stock is doing now.)

Eleven retailers lowered their guidance for either the fourth quarter or the year Thursday, after several updates of same-store sales figures for retailers. The updates found comparable-store sales gains of 2.4 percent, excluding drug stores—well below last year's 7.2 percent, according to Thomson Reuters.

Among them were teen retailers Zumiez and American Eagle, discounter Family Dollar and Victoria's Secret parent company L Brands. Of the stores that projected their earnings lower, the majority mentioned margin pressure, "which didn't come as a shock" following a season that included storewide discounts of 50 percent, said Ken Perkins, president of Retail Metrics.

This was one holiday "they would probably prefer to put in the rearview mirror," he said.

Although experts said the economy is expected to improve next year, Perkins said he doesn't see things picking up so rapidly that retailers will be able to get rid of discounts altogether. But they can trim back on these offerings by providing some sort of value-added entertainment, or making the process of shopping both online and in-store more seamless.

Paul agreed, saying she is still hearing good things from retailers who knew how to leverage their in-store offerings with mobile and online capabilities. She concurred that retailers need to figure out what will set them apart from other stores, whether it's a new fashion trend or a unique offering that consumers are willing to spend a little bit more on. One thing that particularly troubled retailers this year was the lack of a must-have item, which resulted in many of the deep discounts in apparel.

"That's really how retailers win in the marketplace," she said.

Still, Paul cautioned that Thursday's data don't tell the whole holiday story, because the companies in Thomson Reuters' same-store sales index represent only about 20 percent of the retail universe.

One retailer that has so far bucked the trend is Macy's—a favorite among analysts this season—which reported on Wednesday that same-store sales for November and December rose 3.6 percent. The company, which is not included in the Thomson Reuters' index, also announced that it will close five large stores, and a number of analysts upgraded their price targets for the department store.

Belus Capital Advisors' Brian Sozzi, who pointed out that Aéropostale intends to close more than 100 stores, echoed that sentiment in a research note sent out Wednesday.

"Four years after the 'Firesale Holiday Season of 2008' that unleashed a tsunami of store closures across the U.S. to match a new normal level of consumer demand, there is a new wave hitting the shore post a profitable, but below expectations, holiday 2013," he wrote.

But that could be a good thing for retail stocks. Perkins expects that following a huge year for retail stocks—the S&P Retail Index rose nearly 44 percent last year, outperforming the overall S&P—shares will continue to tick higher in 2014, although the gains will likely be in the single digits.

He said that high-fliers such as Michael Kors will likely take a breather, while struggling department stores such as Sears and J.C. Penney will remain under pressure.