Markdowns Take Their Toll on Retail Stocks

It's early in the holiday season, but so far the score is consumers 1, retailers 0.

Retailers reported November sales Wednesday and Thursday, and the news wasn't great, with mostly tepid sales and -- perhaps worse -- warnings that sales are coming on the back of discounts. Consumers are spending more reluctantly these days. And the longer they wait to make their holiday purchases, the more likely they are to get bargains from panicky retailers. The result? A dim outlook for fourth-quarter profits for all but companies with merchandise so compelling that consumers are willing to pay full price.

Gap (GPS Quote) and Limited (LTD Quote) kicked off the lineup of sales reports Wednesday, a day ahead of most retailers.

Gap same-store sales fell 1%, in line or slightly better than expectations. But it also warned that it had to cut prices to move goods, which hurt margins. Margins could take another hit if shoppers wait until close to the holidays to make purchases, the company said. Gap shares fell $1.69, or 6.5%, to $24.13 in late morning trading on Thursday.

Limited's same-store sales rose 3%, less than most analysts had expected. While its apparel brands posted same-store sales gains of 9% thanks to the strength of Express, its overall same-store sales rose 3% due to its majority stake in Intimate Brands(IBI Quote), which saw same-store sales slip 3%. Limited and Intimate Brands both said they were comfortable with current earnings estimates. Nevertheless, Limited shares have fallen 17% since the results were released, while IBI shares have fallen 21%.

Other specialty retailers also struggled in the face of competition and discounts. AnnTaylor (ANN Quote), already hit by downgrades this week, said same-store sales fell 2.9% and warned that fourth-quarter profits may be even with last year's 50 cents a share. Analysts surveyed by First Call/Thomson Financial had anticipated earnings of 73 cents a share. AnnTaylor shares fell $9.31, or 32%, to $20.13 in late morning trading. Abercrombie & Fitch (ANF Quote) also disappointed, reporting an 8% decline in same-store sales. It, too, warned that the holiday sales environment was tough.

Broadline retailers fared slightly better. Kohl's (KSS Quote) reported an 11.2% gain in same-store sales. Wal-Mart (WMT Quote) said same-store sales rose 4.4%, within expectations, and Target (TGT Quote) sales rose 5.4%.

Not everyone is suffering. Talbots (TLB Quote) continued its tear with a same-store sales gain of 21%, several times the gain analysts had expected. Its shares rose $3.75, or 7.7%, to $52.19, close to a 52-week high. American Eagle's (AEOS Quote) shares rose almost 10% after it reported a 13.4% jump in same-store sales

Hot Topic (HOTT Quote), which attracts teenagers like it's giving away tickets to MTV's Total Request Live, posted a 17% gain in same-store sales, though its stock barely budged. Gymboree (GYMB Quote), continuing its turnaround, reported a 34% jump in same-store sales.

Analysts say these companies have differentiated themselves from the pack, be it through the latest trend (Hot Topic) or reliable classics (Talbots). In this environment, it takes a lot to convince shoppers to abandon their "never pay retail" motto. Unless retailers do a lot of convincing between now and the holidays, it could be an ugly fourth quarter.