Here’s what September discounts mean for retailers this holiday season

A woman shops for jewellery at a Kohl’s department store in Alhambra, California.

Frederic J. Brown | AFP | Getty Images

The sharp selloff of retail stocks Tuesday sends a powerful signal: Investors are worried that the deep discounts that battered Kohl’s latest earnings report will be repeated as more retailers report in the coming days. 

Kohl’s said Tuesday the summer’s warmer temperatures stuck around longer than normal this September, and so more retailers used discounts to move unsold products off shelves than it expected.

But it’s not just the weather. Kohl’s CEO Michelle Gass expects heightened promotional activity is here to stay throughout the holiday season. That’s ultimately what drove Kohl’s to lower its full-year profit outlook.

“Weather clearly had a role,” Gass told CNBC in an interview. “When you are in the business of selling sweaters and fleece,” like Kohl’s is, a delayed start to fall makes it tougher to sell some merchandise.

However, other categories like home goods, also saw competitive pricing. And Kohl’s responded by slashing prices even if it hurt its profits.

“I think for us at Kohl’s we stand for value,” Gass told analysts during a post-earnings conference call. “So we must maintain and preserve this position. … So given the landscape, and it is what it is and our guidance reflects that we expect that to continue into [the fourth quarter] — we’re going to lean in and make the short-term investment in pricing and promotion as we need to — to make sure that we can capture these customers and importantly get them on our loyalty ladder for the long term.”

By midday, Kohl’s shares, which have a market value of $7.6 billion, were down more than 18%. Since the start of the year, the stock is down more than 28%

Meanwhile, shares of rival department stores also fell. Macy’s shares, which are valued at $4.7 billion, were down 10% Tuesday. The stock has fallen 49% since the start of the year. Nordstrom‘s stock fell 5% Tuesday. Its shares are down nearly 23%, giving it a market value of $5.6 billion. J.C. Penney shares, which trade just above $1, were down about 1%. 

Macy’s and Nordstrom are both set to report quarterly earnings later in the week, which should offer a clearer picture of the trend and consumer spending. J.C. Penney, which is trying to restructure its debt amid slowing sales, reported its results last Friday. 

Another way, besides discounting, that Kohl’s is responding to the promotional activity is by launching more of its own brands, which offer better profit margins. “We have more coming,” Gass said.

While more seasonal temperatures helped make for a stronger October, Kohl’s said. Beyond apparel, other categories also became more competitive, including in the home category, which is a core part of Kohl’s business.

“[Companies] see home as a way to get new customers,” Gass told CNBC. “We are not going to give up that market share. We are going to lean in and be more [price competitive].”

In a survey by Adobe Analytics of 403 U.S. retailers, from Oct. 23 to Oct. 29, the biggest “challenge” cited by companies for this holiday season was staying competitive on price, with 40% of respondents saying they are concerned about this. Seventy-five percent of retailers are planning to offer sales earlier this holiday season because of the shortened shopping calendar this year.

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