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Retailers' deep discounts get chilly reception

Despite tight price-competition among retailers, consumers remain cautious.

Chris Young/THE CANADIAN PRESS

Retailers will have to work harder to get some holiday cheer as they respond to penny-pinching shoppers who are chasing deals.

Major chains' third-quarter results and November sales in North America provide early signs that merchants are struggling to make gains in a highly competitive pre-holiday period, forcing them to slash prices and threatening to compromise their fourth-quarter bottom line.

Hunting for bargains, cash-strapped consumers are drawn to discounters, helping dollar stores emerge as relative retail stars, but with caveats. Montreal-based Dollarama Inc. reported on Thursday that its third-quarter profit jumped 20 per cent, but it missed analysts' estimates a bit and its shares fell 2.1 per cent.

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As a reflection of just how cost-conscious customers are, Dollarama finds that they hanker for $1 items in the holiday period and tend to overlook the retailer's pricier merchandise that now ranges to as much as $3.

In the U.S., an array of retailers on Thursday reported November same-store sales at outlets open a year or more rose just 1.1 per cent – excluding drugstores – compared with predictions of a 2.6-per-cent increase, said Ken Perkins, president of researcher Retail Metrics.

"Santa delivered some early lumps of coal in retailers' stockings," Mr. Perkins said.

A soft start to the crucial holiday shopping period was marked by deep discounts that failed to yield strong sales. It resulted in some chains, ranging from dollar-store purveyor Dollar General Corp. to clothier Express Inc., lowering their year-end profit outlook.

Retailers grappled with generally disappointing business on Black Friday, a tradition in the United States of offering deals on the day after its Thanksgiving that has now extended into a week of late November bargains and moved to Canada.

Some retailers missed their November same-store sales expectations and pointed to the challenges of a shorter holiday season – six fewer days between Thanksgiving and Christmas than last year – and "a very competitive and difficult environment," said Jharonne Martis, director of consumer research at Thomson Reuters.

As Rick Dreiling, chief executive officer of Dollar General, summed up: "2013 has turned out to be another difficult year for our core customer."

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The fourth quarter is "extremely difficult to read," he added. "Competition has gotten more aggressive on select traffic-driving items, and consumers are overly cautious."

A combination of high unemployment, underemployment, higher payroll taxes, fewer staff benefits and uncertainties over health-care insurance and insurance costs "are contributing to erosion in consumer confidence," he said.

Dollar General's third-quarter same-store sales rose 4.4 per cent – one of the strongest among major retailers – but it lowered its fourth-quarter forecast. Same-store sales at Costco Wholesale Corp., another high-performing chain, rose 2 per cent, below the 3.3-per-cent increase analysts expected, according to Thomson Reuters. And L Brands Inc., owner of lingerie chains Victoria's Secret and La Senza, saw its same-store sales drop 5 per cent, compared with predictions of a 1.1-per-cent decline. It was the first time the company missed estimates since late 2009.

Still, despite the hurdles, Dollarama's CEO Larry Rossy is "happy" with how the holiday season is shaping up. In its third quarter, same-store sales rose 4.8 per cent while the average purchase increased 2.9 per cent and traffic climbed 1.9 per cent.

"You're affected by weather, you're affected by this weak business that we are dealing with," Mr. Rossy said. But generally things are going according to plan, Dollarama executives said.

Wal-Mart Canada Corp. executives may not be as happy. Its third-quarter same-store sales dipped 1.3 per cent while traffic to its stores slipped 1.5 per cent, it said last month. Still, its share of the grocery market gained 1 per cent and its online sales jumped 96 per cent, it said.

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Even so, holiday retail success may just come down to weather for a chain such as Dollarama.

"It will all look great if we have nice, good weather for the next three weeks across Canada – we'll look like geniuses," CEO Mr. Rossy told analysts. "If it starts snowing and we can't get to our stores, then we'll probably look like less than geniuses."

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About the Author
Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More

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