Retailers brace for ho-ho-hum sales

Holiday season looms with questions about economy, spending

October 21, 2007|By Andrea K. Walker | Andrea K. Walker,Sun reporter

Kim Letke bought her first Christmas gift of the season recently when she found the Moon Sand castle play set for her kids.

But the Timonium woman believes it's probably going to be a tough season for her family because the work her husband does in the home improvement business has slowed along with housing sales.

"We might be spending a little less this year," said Letke, as the stay-at-home mom watched her kids run around the play area at Towson Town Center recently.

Retailers are hearing similar consumer concerns, and many merchants are braced for sluggish sales as they prepare for the holidays. The shopping season typically begins modestly just after Halloween as retailers gear up for the official post-Thanksgiving start. But crews are already decorating some stores, and holiday catalogs from Montgomery Ward, Neiman Marcus, L.L. Bean and others are in the mail.

The National Retail Federation predicts that sales this holiday season will post the weakest growth in five years. And some of the nation's top retailers are lowering sales forecasts for the year or planning to hire fewer workers in November and December.

For shoppers, that probably means steep discounts and extended store sales. Wal-Mart Stores Inc. already announced several price cuts on toys and other merchandise; that decision from the world's largest retailer is likely to force others to follow, analysts said. Other companies, including Nordstrom, have started marking down fall goods to make way for holiday merchandise.

While retailers acknowledge that predicting how consumers will spend during the holiday season is never a precise science, the economy is clearly wearing on customers. Most retailers point to the weakened housing market, high energy prices and a credit crunch among the nation's banks as key signs that consumers will be more frugal this year.

Customers have already provided a glimpse of their concerns, leading several retailers to report less-than-stellar results on back-to-school and early fall sales. Although the stock market showed signs of rebounding when the Federal Reserve cut two key lending rates last month, concerns about subprime mortgages and other bad economic news through August may be fixed in consumers' minds as they shop for the holidays, experts say.

"All the conversation around the economy being in trouble is causing consumers to sit on their wallets," said Craig Rowley, vice president of the Hay Group, a national retail consulting practice in Dallas.

Still, retailers do not expect consumers to spend less than last year; the growth rate is estimated at 4 percent for the season, which includes November and December. But sales rose 4.6 percent in 2006 to $456 billion.

Those figures fall below the 10-year average of 4.8 percent. The forecast for this year would mark the slowest growth rate since 2002, when holiday sales increased just 1.3 percent.

Several retailers are responding to the anticipated slowdown by ordering less merchandise, analysts said. And a recent survey by the Hay Group found that 85 percent of the top retailers expect to hire the same number or fewer workers compared with last year.

Some major retailers recently lowered earnings forecasts for 2007, in part because of weaker-than-expected September sales, and many analysts pointed to last month's figures as a sign that the holiday season could be a difficult one in terms of profits. More than a dozen retailers, from luxury emporium Nordstrom to discounter Target Corp., cut earnings forecasts for the final quarter. And Macy's Department Stores expects sales to be flat or rise no more than 2 percent in the quarter.

To address these worries, retailers such as Wal-Mart are changing their holiday strategy. Besides its toy announcement in September, the company said last week that it would cut prices on 15,000 items - 20 percent more than last year.

Despite those moves, a Wal-Mart spokesman played down the early concerns about the holiday season, saying most consumers have another month or so to decide how to approach their gift-giving. "There's differing opinion in the market about holiday spending - spending is tighter in some markets than others - but regardless we feel well-positioned," said Steve Restivo.

Analysts said discounters such as Wal-Mart are the most vulnerable in a slowing economy, because their typical customers are the first to curb spending.

"The less affluent customer is the one to most likely be affected," said Doug Hart, a partner with the retail and consumer product practice of BDO Seidman LLP. "They have less disposable income to begin with. So when the price of basic goods rises - that eats into their disposable incomes even more."

But even high-end stores, largely unaffected in swings in the economy in recent years, are showing signs that the season will be tough for them, too. Nordstrom and Saks Fifth Avenue, for example, missed sales estimates in September.

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