Shopping Starts Strong, but Discounts Breed Doubt

Strong post-Thanksgiving sales boosted retail stocks early on Monday, but shares fell later in the day as the overall market slumped and doubts blunted early optimism.

Consumers poured into stores and flocked to online shopping sites on so-called Black Friday, the day after Thanksgiving that marks the traditional start of the holiday shopping season. Overall, retail spending for the weekend was up more than 12%, according to research firm ShopperTrak RCT. Wal-Mart ( WMT) and J.C. Penney ( JCP) especially reported strong sales.

What resulted were modest gains in early trading. But many retailers gave up those gains in the afternoon as the overall market slumped on manufacturing news. Additionally, some analysts raised concerns about whether the retailers' final results would turn out as well as the early returns, given the short season and a trend toward heavy discounting that could eat into margins.

The majority of holiday sales come in the two weeks prior to Christmas, wrote Kristine Koerber, a retail analyst with W.R. Hambrecht, in a research note. It's simply too early to tell how well things will turn out, she wrote.

"Consumers typically wait until the last minute to purchase gifts, and we see this year as being no different."

In fact, consumer shopping over the weekend was driven by the shortened holiday shopping season and a large number of discounts offered by retailers, said Scott Krugman, a spokesman for the National Retail Federation.

"Retailers have done an amazing job of letting consumers know that they are all going to be discounters this year," Krugman said.

Both Wal-Mart and Sears, Roebuck ( S) for instance, heavily promoted Friday discounts to customers. Although declining to give sales figures, Sears spokeswoman Peggy Palter said the company saw an "encouraging" start to its holiday season, with foot traffic in its stores as busy or busier than last year.

"Our discounts were driving traffic," Palter said.

Such discounting could end up hurting margins. "Aggressive promotion means lower gross margins means lower EPS, Real Money's Scott Reamer wrote Monday. "We'll see how promotion trends evolve from here; the best case is they stay where they are. The worse case is that they get more aggressive as we close in on Christmas."

Despite such skepticism, some retail stocks retained at least part of their early gains. Wal-Mart, which reported record single-day sales of $1.43 billion for Black Friday, was up 70 cents, or 1.3%, in afternoon trading, to $54.60. J.C. Penney, which also reported record Thanksgiving sales, saw its stock jump 63 cents, or 2.7 %, to $24.36.

Others didn't fare as well. Limited Brands ( LTD), which operates Victoria's Secret and Express, saw its stock fall 31 cents, or 1.8 %, to $16.70. Toys R Us ( TOY) stock fell 17 cents, or 1.25 %, to $13.44.

Consumers spent $15.9 billion from Friday through Sunday, according to a report released Monday by ShopperTrak. That's up more than 12% from the $14.2 billion consumers spent in the weekend following Thanksgiving last year.

Traditionally the biggest retail day of the year, Friday saw the bulk of retail sales, making up 46% of the total. Consumer spending tailed off the next two days, with Sunday accounting for just 21% of the weekend total.

More than 75% of consumers shopped over the holiday weekend, according to the National Retail Federation. The NRF, which didn't conduct the same survey last year, expects consumer spending for November and December to increase 4% over last year.

The Mouse vs. the Mall

Meanwhile, online sales also surged after Thanksgiving, reaching the top end of estimates. Consumers spent $150.9 million over the Internet on non-travel retail sales on Friday, a 40% increase over the $108.1 million that consumers spent on the Friday after Thanksgiving last year, according to ComScore Networks. ComScore expects online sales to be up 30% to 40% for the fourth quarter this year, said Michelle David Adams, vice president of the Reston, Va.-based company.

Lured by the convenience, the lack of crowds and free shipping offers, growing numbers of consumers are heading online to shop, said Adams, driving the surge in sales.

"We're seeing a channel shift," Adams said.

The question for e-tailers is what effect the discounts will have on their bottom lines. Last quarter, Amazon ( AMZN) saw its profit margins erode after it decreased its threshold for free shipping from orders of $49 or more to orders of just $25. Still, despite the effect on its margins, Amazon was able to post strong growth and an improved bottom line.

Amazon shares were up 86 cents, or 3.8 %, to $24.24 on Monday afternoon.

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