Dive Brief:

• Retailers — even upscale merchants — are using heavy promotions to clear out product ahead of the holidays, both in stores and online, according to gumshoe reporting by The Wall Street Journal’s “Heard on the Street” financial column, which checked in at Ralph Lauren, Macy’s and Gap stores last week.

• Columnists found store-wide 30% off sales at Polo Ralph Lauren on New York's Fifth Avenue Dec. 20 on top of other drastic promotions, while at Macy’s, prices at brands like Fossil and Michael Kors were slashed this week after selling at healthy prices (even full price) the week before.

• In regular store checks, retail investment research firm Retail Metrics similarly found that promotional levels at retailers this year have been comparable to 2015 activity, although last year weather conditions and inventory levels (which have been more favorable this year) forced the discounts.

Dive Insight:

The holiday season is shaping up to be a disappointment for retail margins. Of the $4 billion in online sales recorded from Nov. 1 to Dec. 18, orders using promotions surged 131% from last year and accounted for more than half of all transactions, Retail Metrics president Ken Perkins said in an email to Retail Dive, citing Dynamic Action data.

“Holiday 2016 has been marked by several key themes," Perkins said. "Heavy promotional levels despite lower inventory positions; rapid expansion of mobile shopping and shift of sales to e-commerce; mall traffic continues to wane — even on major shopping days, increased wallet share to experiences, travel and dining as gifts; the lengthening out of holiday shopping with early deals and ability to shop at anytime and anywhere via mobile devices, and weather more favorable than the previous two years (colder and seasonal).”

Amazon is the likely primary beneficiary of the shift to mobile and e-commerce, Perkins also noted.

“Amazon has seemingly been in the news every day this holiday season, from selling out of its voice-activated Echo speakers to its first commercial drone delivery as it continues to rack up phenomenal sales growth,” he said. “[I]t is expected to generate Q4 revenue growth above all retailers in our Retail Metrics Retail Earnings Index.”

Perkins cited a December survey from Prosper Insights & Analytics which found that among nearly 7,000 consumers, 26.2% bought most if not all of their gifts from Amazon, up 10% from last year. “As Prime membership penetration grows, coupled with Alexa ordering, this number is likely to keep growing,” he said. “Wal-Mart was a distant second at 14.5%.”

Retailers’ troubles are continuing despite more favorable macro-economic conditions, like rising employment and wages and sound home prices, according to Perkins.  

"Consumer net worth is at all-time highs, fueled in part by equity markets at or near all-time highs,” he noted. “Theoretically, consumers should have money to spend this holiday season with the economy in its best shape since the financial crisis almost 10 years ago … Most consultancies and trade organizations put holiday sales growth between 3%-4% year over year. Regardless of holiday sales projections, it is clear the U.S. economy is in the best shape to support consumer spending it’s been in since 2007. Improving economic fundamentals coupled with healthy holiday sales projections are not, however, translating into equally healthy Q4 earnings and same-store sales forecasts.”

The 116 chains in the Retail Metrics Retail Earnings Index are expected to post a 1.8% drop in year-over-year profits, weighed down primarily by Wal-Mart’s heavy investments in wages, in-stock positions and prices as well as IT infrastructure in its effort to compete with Amazon. Factoring out Wal-Mart’s drag on fourth quarter earnings, projections results in the remaining 115 chains are forecasted to grow earnings by 2.1% year over year. Fourth quarter same-store sales for the same group are estimated to rise just 1.0% following a 1.1% gain in Q3 and gains of only 1.1% & 1.0% in the first two quarters of this year, Perkins said. 

Though more retailers are expected to lose money, 46% of retailers are expected to post earnings declines in the fourth quarter, compared to 53% last year. Perkins said that home improvement, personal care and footwear retailers are set to generate the biggest Q4 earnings growth, while teen apparel, discounters and department stores are expected to report the largest Q4 earnings declines. Amazon is the only retailer in the top 10 in terms of both earnings and revenue growth, he said, coming in at number seven, with 50% year-over-year earnings growth on top of a much bigger base than any of the chains ahead of it. Amazon revenue growth is projected to top all other retailers in the index with 25% year-over-year growth.

“Amazon is moving into virtually every segment of retail with a huge push most recently into the apparel space that will be particularly disruptive to department stores and specialty retailers,” Perkins said. “Amazon offers music and video streaming to Prime members, along with original programming that is popular among millennials and difficult for other retailers to compete with. Same-day delivery is available in 37 markets and set to expand further. One-hour delivery is available in select urban areas and will almost certainly expand. Alexa and Dash are making it increasingly easier to skip the trip and will put additional pressure on retailers as they attempt to garner both in-store and web traffic.”

This story is part of our ongoing coverage of the 2016 holiday shopping season. You can browse our holiday page for more stories.