UPDATE: Retailers Show Softness In December Same-Store Sales

Retailers appear to have overestimated the spending momentum of consumers and are delivering December sales numbers that show the poor economy still has the upper hand.

From discounter Target Corp. (TGT) to department store Macy's Inc. (M) and teen retailer Aeropostale Inc. (ARO), same-store sales figures for December, retailers' biggest sales month of the year, are poor.

Target Chief Executive Gregg Steinhafel said "lower-margin items drove a higher portion of sales than expected." Steinhafel added that sales of some key gift items shifted earlier into the holiday season, presumably in November, which ate into last month's sales.

Macy's, despite missing analysts' estimates for the first time in more than a year, put up a good front, saying it met its own "high expectations" and reiterated its guidance, although not lifting it as it had after posting strong November same-store sales.

Fellow department store J.C. Penney Co. (JCP) was among few department stores to exceed expectations, posting 3.7% same-store sales growth when 3.3% was projected.

Luxury continued its strong comeback, with Saks Inc. (SKS) posting 11.8% comparable-store sales growth, when 3.9% was projected. Nordstrom Inc. (JWN), also on the high end, reported a 8.4% increase, ahead of 3.4% expectations.

Abercrombie & Fitch Co. (ANF), was a standout in the teen group, with its heavy discounting taking customers away from rivals including Aeropostale Inc. (ARO) and American Eagle Outfitters Inc. (AEO), which both missed analysts' projections.

Given the soft leaning of most retailers' numbers, December's showing may not bode well for the new year. "These numbers say the consumer is going to remain cautious and be very conscious about price increase," said Mark Montagna, retail analyst at Avondale Partners

The assessment comes at a time that retailers are facing increased costs for cotton and other raw materials, a new phenomenon for them after a couple of decades of stable or even lower prices. Consumers and retailers are also expected to be hit with large increases in gasoline prices. "Basically, the entire supply chain cost is rising," Montagna said.

Retailers came in a little shy of expectations, posting a collective 3.1% increase. While sales appeared stronger at the beginning and end of the month, the middle saw a lull. All told, the 28 retailers followed by Thomson Reuters were expected to report that their December same-store sales rose 3.4% after a 5.6% gain in November. Sandwiched between was the recession and lingering economic weakness in which December comparable-store sales dropped 2.5% in 2009, declined 0.7% the prior year and rose 3.2% in 2007.

Retailers may have had a false sense of security after November's sales proved especially strong. "After a strong start to the holiday season in November, sales and traffic trends for our brands were less consistent in December," said Sabrina Simmons, Gap Inc.'s (GPS) chief financial officer.

The season ended up being promotional many retailers said, as planned sales early in the season were stepped up as Christmas approached to capture customers. J.C. Penney said it experienced more transactions in December, but average prices declined during the month. Wet Seal cited "an extremely promotional competitive environment" that prompted it to promote more aggressively than its initial plans.

Retailers were also contending with massive strong storms in the West before Christmas and in the East just after the holiday. Some $1 billion of sales may have been put of because of the blizzard that hit the East Coast the day after Christmas, mall traffic monitor ShopperTrak estimates.

There were some success stories, although their comparable-store sales in a number of cases weren't as strong as they have been in prior months. Limited Inc. (LTD) reported a 5% rise in same-store sales, beating expectations for a 4.6% gain. Buckle Inc. (BKE) said sales at stores open more than a year rose 6.1% in December, when a 4.5% increase was expected.

A number of retailers have reduced their quarterly expectations as a result of their showing. Wet Seal, women's apparel retailer Cato Corp. (CATO) and Bebe Stores Inc. (BEBE) have all tempered their views.

Consumers appear to have come into the holiday season primed. In December 2009, only 10% planned to spend more on holiday gifts than the previous year, according to a U.S. spending survey by Discover Financial Services (DFS). In 2010, the number rose to 14%. Also, only 57% planned to spend less on holiday gifts during the recent holiday season, 7 percentage points less than in 2009, Discover said.

This was the year retailers also had an additional leg up, having their online operations come into their own. U.S. online sales for the November through December holiday shopping period were a record $32.6 billion, up 12% from a year earlier, according to ComScore Inc. (SCOR), with Cyber Monday, the Monday after Thanksgiving, seeing more than $1 billion spent, the largest one-day online sales day ever.

-By Karen Talley, Dow Jones Newswires; 212-416-2196; karen.talley@dowjones.com

-Catlin Nish contributed to this story.

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