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Heavy discounts fuel only modest retail gains

NEW YORK — Americans took a pause in shopping in October, leaving retailers with their weakest peformance since April as unsually warm weather depressed their appetite for cold weather items.

Stores were forced to discount more on coats and hats to get shoppers to spend. And even as the weather cools, discounts will be necessary to keep pulling shoppers in amid high unemployment, analysts said.

The International Council of Shopping Centers index measuring revenue at stores open at least a year showed a 1.6 percent increase, the weakest performance since April’s 0.8 percent increase. October’s figure represented a slowdown from September, when it rose 2.6 percent.

Bright spots among retailers reporting revenue figures Thursday were Costco Wholesale Corp. and Limited Brands Inc., both of which reported bigger increases than Wall Street analysts expected. Macy’s Inc., helped by tailoring merchandise to local markets, also had a decent performance, outshining rivals such as J.C. Penney Co. and Kohl’s Corp., both of which suffered sales declines. Target Corp. posted a small gain that’s slightly above Wall Street estimates. And Gap Inc. posted a surprise gain.

Luxury chains like Saks Inc. continued to do well as wealthy shoppers are back to spending, albeit cautiously.

“It was a promotionally driven month,” said Jharonne Martis, director of consumer research at Thomson Reuters. “Warm weather hurt sales of fall merchandise. We expect discounting is going to be necessary to drive holiday sales.”

The figures are based on revenue at stores open at least a year. That’s considered a key indicator of a retailer’s health because it measures growth at existing locations and excludes new or closed stores.

The big factor depressing October sales was the unusually warm weather, said Mike Niemira, chief economist at International Council of Shopping Centers. He estimated that depressed October sales by one percentage point.

For retailers, the good news is that heavy discounting may not hurt third-quarter profits because October is the least important month for the period, according to Ken Perkins, president of RetailMetrics, a research firm. Macy’s and Limited raised their earnings outlook. Gap offered a surprising strong profit outlook that topped analysts’ estimates.

October is typically slow because it’s between back-to-school season and the Christmas season, but shoppers took more of a breather this year. That made stores push discounts even more to entice consumers, who are buying even closer to when they need the items in the wake of the Great Recession.

Shoppers are expected to remain tight-fisted with unemployment stuck near 10 percent. That’s why many more stores than last year are pushing discounts on holiday gifts earlier, even before Halloween.

Americans are also being bombarded with holiday ads on TV. Best Buy Co., for example, started its holiday TV ad campaign Monday; last year, it began Nov. 11.

A report Thursday from the Labor Department underscored the job market’s weakness. It showed the number of people seeking jobless benefits jumped sharply last week, after two straight weeks of declines.

Against this background, warehouse clubs and discounters are holding up better than stores in middle price ranges. Costco said Thursday that its revenue at stores open at least a year climbed 6 percent in October as international results improved in part because of the weaker dollar.

Analysts polled by Thomson Reuters expected a smaller 4.6 percent increase.

Target posted a 1.7 percent gain in October, slightly better than the 1.5 percent estimate from analysts. CEO Gregg Steinhafel said in a statement the results were at the low end of the company’s expectations because of softness in the first half of the month.

Steinhafel noted traffic is healthy in stores, and the company is seeing essential items sell better than discretionary items. Target, which is counting on a much-publicized 5 percent discount to store credit and debit card holders, said it expects revenue at stores open at least a year to increase in the low-single-digit percentage in November.

Limited, the operator of Victoria’s Secret, Bath and Body Works and other businesses, reported a 9 percent gain, well above the 6.1 percent forecast.

Gap had a 2 percent rise in October revenue at stores open at least a year; analysts had expected a 2.5 percent decline.

Department stores had a mixed performance. Macy’s posted a 2.5 percent increase, though it said that sales in the beginning of the month were weak because of the warm weather. Analysts had expected a 1.6 percent gain. Terry Lundgren, Macy’s chairman, president and CEO, said in a release that its new holiday gift shops are getting a good response from customers.

Luxury seller Saks Inc. enjoyed a 8.1 percent gain in revenue at stores opened at least a year, much better than the expected 2 percent increase.

Many teen retailers posted disappointing results. Abercrombie & Fitch Co.’s 2 percent gain was well below the 5.6 percent estimate from Wall Street. American Eagle Outfitters Inc. had a 2 percent decline; analysts were expecting a 1.4 percent gain.