Why Retailers Got Hit This Week

Companies from SodaStream to Lululemon took huge hits over the last week, but the reasons for the falls varied.

Jan 14, 2014 at 1:05PM

The morning papers may have been a bit of a shock for you today, especially if you're heavily invested in American retailers -- or if you hadn't seen that Peanuts strip yet. A wave, nay, a storm system, of bad news has descended on the sector, and yesterday it all came to a head. Yesterday was a sort of sector deadline for updates due to the beginning of the ICR XChange conference. Companies that are going to present at that conference needed to release updated financials in order to talk about those financials at the conference.

So, during the past week, December sales information and updated quarterly guidance came down from SodaStream (NASDAQ:SODA), lululemon athletica (NASDAQ:LULU), and Pier 1 (NYSE:PIR), among others. All that news was bad. All of it. You might have thought, "Hey, here comes some good news for me, the average retail investor." Sorry.

What went wrong?
Analysts said the 2013 holiday season was the worst in years. Black Friday weekend sales fell, and the shortened shopping season took a heavy toll. SodaStream, for instance, cited lower selling prices and a shift in the company's product mix. That's a good summary of the problems that the entire industry saw.

Consumers suffered throughout 2013 with incomes flatlining across the board. That gave everyone a reason to look for more deals, or simply cut back altogether. The shorter selling season didn't help, either. Traditionally, retailers have thrived during the holidays on both the focused shoppers and the walk-in shoppers. For instance, by having big red signs out front for a month, you get extra foot traffic from the guy who was just going to go to the grocery store but saw that shoes were on sale. This year, there was less of that.

As a result, retailers felt the need to be more promotional to drive focused foot traffic, but sometimes not even that tactic was going to work. Pier 1's sales update last week was evidence of the generally difficult environment that retailers were fighting in. The company dropped its quarterly earnings, revenue, and comparable sales outlook due largely to bad weather. Management was happy with the promotional mix, but even with solid execution, it looks like Pier 1 is going to suffer.

Other issues in retail
While weather, the short season, income issues, and promotions are hurting a lot of businesses, investors shouldn't overlook the fact that some brands are simply weak right now. Lululemon announced a massive setback in sales yesterday, but not due to the environment. Instead, the business is still suffering from the massive brand setback that it experienced this year due to product quality issues and an uncensored founder.

The plunge this week should be the low point for many brands in the first half. Now that the clock has been reset, businesses can look forward to a stronger 2014. The holiday season this year -- a mere 40-some-odd weeks away -- should end up comparing favorably to a horrible 2013. Even so, businesses will still be struggling with flat incomes and other consumer drags for much of the year, if not the entirety of 2014. In short, better but not great.

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Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends lululemon athletica and SodaStream. The Motley Fool owns shares of SodaStream. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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