Retailers' holiday hopes rosy

Stores' projections call for 4% to 7% more spending, but all other indicators suggest consumer caution

October 11, 2005|By ANDREA K. WALKER | ANDREA K. WALKER,SUN REPORTER

Ready to shop?

It certainly doesn't look like it.

Consumer confidence recently posted its biggest monthly drop in 15 years. Gasoline prices remain high and consumers are bracing for more expensive heating bills.

The nation lost jobs last month for the first time in two years, the federal government reported last week, although not as many as feared.

FOR THE RECORD - An article about holiday retail sales that ran in the Business section Oct. 11 incorrectly stated that Casual Male is a private company.
The Sun regrets the error.

Past-due credit-card accounts were at a record high, bankers recently reported. The economic impact of Hurricanes Katrina and Rita are still lingering. And warnings from the Federal Reserve about inflation have dampened the stock market.

Yet in spite of that, holiday retail projections are calling for a healthy increase. Though expectations aren't as great as last year, retail analysts are predicting 4 percent to 7 percent more holiday spending than last year.

Is it wishful thinking by retailers? Or will consumers set their anxieties aside? The questions are huge for retailers and investors on the eve of the shopping season, which officially starts next month and accounts for a fifth of the industry's take for the year.

The National Retail Federation, a Washington trade group, predicts a 5 percent increase in holiday sales. NPD Group, a New York research firm, calls for a 4 percent increase. Retail Forward, a consulting and market research firm, has forecast a 5 percent to 5.5 percent increase. And the retail practice at Ernst & Young predicts a 6 percent to 7 percent jump.

The retail groups and financial analysts argue that there's still enough time for a rebound before the season gets into full swing weeks from now. Others say there's psychology at play, with industry representatives not wanting to dampen emotions and foster a self-fulfilling prophecy.

"At this point in time, it's important for retailers to be confident," said Aaron Keller, co-founder and managing principal of Capsule, a marketing firm in Minnesota, and a professor of economics at the University of St. Thomas in Minnesota.

"When it's on the fence like this - unclear which way the holiday season may go - it's better to stay positive rather than negative or even wishy-washy," Keller said.

Paul Mason, an economics professor, said retailers use "moral suasion," to subliminally persuade shoppers to spend. "By saying it will be a good holiday season, they're trying to convince people to believe that," said Mason, chairman of the department of economics and geography at the University of North Florida.

But monthly sales figures released by the major retailers last week signal that consumers are already feeling a pinch. Many consumers last month shopped the discounters for necessities but seemed to have pulled back on casual spending. Wal-Mart Stores Inc. and Target Corp., the two largest discount chains, posted gains while more upscale Ann-Taylor, the Gap and Talbots suffered losses.

"It's certainly psychology," said Thomas Burns, a senior vice president at the Doneger Group, a retail consulting firm in New York. "It may make people feel warm and fuzzy, but certainly it will be the consumer who makes the decision. It's probably going be a season, in my opinion, that is very challenging."

Many of the recent retail forecasts took into account the hurricane season and rising gas prices, which is why some of the estimates are more modest than last year. For instance, NRF, the retail industry's major trade group, reported a 6.7 percent increase last year, but predicts a 5 percent rise this year.

But none of the retailers expects the recent convergence of economic fears to cause a poor showing because the economy was healthy for most of the year. Rising wages should continue to offset rising gas prices as they have for much of the year, they said.

Cold weather typically doesn't set in until December for much of the country, which has also enjoyed a mild fall, so many people won't see higher home heating bills until after the holidays, retailers and analysts predict. They also expect consumers to cut back on forms of entertainment such as movies and eating out rather than on gift-buying.

After the terrorist attacks in 2001, retail sales plummeted because people didn't feel good about spending on extravagances. The early impact of hurricanes and the sobering images from Louisiana and Mississippi might have had similar effect, but some in the industry believe the initial shock will be short-term.

"We hope the images people see by the holidays would be of people rebuilding," said Jay McIntosh, director of retail and consumer products at Ernst & Young. "Keep in mind, we still have four or so weeks before the season actually begins."

Casual Male, a Canton, Mass.-based men's clothier, is predicting an increase in holiday sales from last year.

The privately held company, which doesn't release specific numbers, has introduced a more stylish line of clothing and better size selection that it hopes will draw shoppers.

"Considering the concern with the economy right now, I'm still optimistic that we'll probably see an improvement over last year," said David Levin, president and chief executive officer of Casual Male. "But it would be crazy not to know that with energy prices like they are, there's going to be some impact."

Some retailers acknowledge that they're not out of the danger zone, especially if the weather turns sharply and early heating bills arrive. Because of the anxiety, Wal-Mart and others are expected to mount a heavy promotional season and offer bargains early.

"Consumer confidence has plummeted, and I think consumers are weary about just where gas prices and other energy prices are headed this year," Steve Spiwak, an economist with Retail Forward, said in a recent conference call. "I think in that environment, retailers won't want to play the `staring game' with consumers."

andrea.walker@baltsun.com

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