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Nieman Marcus, Luxury Retailers Struggle On

Luxury department stores have been trying to cope with an economy that has pressured sales and profits, but many are holding their own despite weak Black Friday traffic and some customers who are shopping less-expensive retailers for frugality's sake.

Nieman Marcus (NMGA) just reported that comparable store sales -- those in stores open for at least a year -- declined 15 percent for its first quarter when the analysts were expecting 14 percent. The company's CEO Burt Tansky said that the company anticipates an extended period of softness in luxury buying. So it will be increasing the visibility of its mid-priced and lowest-cost merchandise as spring approaches.

But comps don't tell the whole story. Sapna Shah and Lisa Walters, principals and analysts for Retail Eye Partners, characterized Nieman's results as better than expected. While sales have been slow, they related, the retailer has made strides in lowering inventory levels, which helped limit markdowns, and in boosting its profit margins versus the same period last year.

Shah and Walters, who spend much of their time in stores checking on what's in and who is coming by to purchase it, identified a trend for lower markdowns â€" with most at 40 percent off versus 75 percent at this time in 2008 -- that continued at Neiman into the current quarter, and less actual discounting activity is evident among the displays compared with a year ago.

Luxury retailers haven't missed the hard-core shopper, who still is purchasing, they pointed out. Rather, those retailers have lost the aspirational shopper, the one who can marginally afford the products Nieman Marcus, Saks (SKS), Nordstrom (JWN) and their rivals stock, or can do so only occasionally. That's a big group of shoppers.

Shah and Walters tackled some questions put to them by Bnet via email. While Black Friday may have been a slow day for a lot of luxury retailers, as reported here, top-of-the-market department stores have a strategy to remain healthy in the soft economy and live to sell another, better day.

Bnet: Are luxury retailers determined to protect the bottom line or were the decisions on markdowns we saw in the period around Black Friday a miscalculation?

Shah & Walters: Inventories are so reduced this year at luxury retailers that we haven't seen them need to mark down as much versus last year. Which is resulting in lower sales but more profitable ones for these retailers.

Bnet: Some markdown activity at Bloomingdales was deep but inconspicuously signed. Given the environment, do luxury retailers have to become more demonstrative in promoting the deals they offer?

Shah & Walters: No, they have so few deals they are offering versus last year, and they are promoting them through email, in-store signage, social media, etc. There just isn't enough sale in the store to warrant shouting it from the rooftops. And retailers don't have to, as we believe there is little excess inventory that they need to clear out.

Bnet: Do luxury retailers run the risk -- in era of conspicuous frugality and fashion designers doing projects for Target (TGT) and J.C. Penney (JCP) -- of losing customers to lower-tier retailers if they don't adopt aggressive promotional practices?

Shah & Walters: We believe the super luxury customer has and will continue to shop at luxury retailers without excessive promotion. However, the aspirational customer has traded down to options that are more affordable for them, as there are many knock-off/similar looks available at cheaper price points.

Bnet: What are the prospects for luxury retailers through the holidays and clearance season? How does a poor holiday affect their prospects for next year?

Shah & Walters: We believe luxury retailers will fare better than last year at this time from an earnings perspective even if sales are still very slow as inventory levels and markdown levels are below last year, which means that post-season clearance will be lower.

Bnet: How are luxury retailers working their outlets, such as Nordstrom Rack, into their overall sales strategies, and do outlets create a dilemma for luxury retailers who may see shoppers prefer them to the department stores?

Shah & Walters: This strategy continues to work as the aspirational shopper has traded down to outlets, so it's two different customer bases shopping the two channels. We think that trend will continue.

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