Holiday discounts crimp retailer's profits

The 2011 holiday shopping season will go down in the record books as the year the Grinch stole stores' profits.

Many retailers sacrificed their bottom lines by pushing heavy discounts to shoppers bent on getting a good deal in a challenging economy. That created a sharp divide between stores that won the battle for wallets and those that didn't.

The big winners? Shoppers who held out for deals late in the season.

Retailers collectively reported a 3.5 percent increase in revenue for December, according to a tally of 25 merchants compiled by the International Council of Shopping Centers. For November and December combined, the figure rose 3.3 percent, a solid increase but still behind last year's 3.8 percent pace.

The figures are based on revenue at stores open at least a year. That is considered a key indicator of a retailer's health, because it excludes results from stores recently opened or closed.

Retailers depend on the holidays, when they bring in as much as 40 percent of their annual revenue. The season also gives valuable insights into what it takes to get Americans to spend in the weak economy.

Clearly, the rich kept spending, but for everyone else it took a hot item like Apple's iPad or right-on exclusive fashions -- or a lot of "50 percent off" signs.

Winners included Limited Brands Inc., Macy's Inc., TJX Cos. and Nordstrom Inc., which posted strong revenue gains that beat analysts' estimates. Among mainstream department stores, Macy's was the biggest winner, posting a 6.2 percent increase in December.

On the losing side, Target Corp., Kohl's Corp., and J.C. Penney Co. cut their fourth-quarter earnings projections after reporting weaker-than-expected sales. Target posted just a 1.6 percent gain in December on weak sales of electronics, books and music.

"There's no question that the divide is getting wider, and will get even wider this year as the winners continue to take share away from rivals," said Joel Bines, managing director in the retail practice of AlixPartners. "Consumers have limited time, money and attention, and they're investing in a smaller subset of retailers."

Retailers will report fourth-quarter earnings next month. The fullest picture of holiday spending will come in next week's government retail sales report, which captures more categories like home improvement and electronics.