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Retailers Already Bracing for Weaker Holiday Shopping Season

U.S. retailers are still sweating through the back-to-school shopping season, but an early chill has already crept into their prospects for the all-important holiday season.

Numerous retailers, from Wal-Mart Stores to Target to Ross Stores, have warned that the second half of the year will be more difficult than the first as the deteriorating housing market, higher fuel and food costs, and an undulating stock market take a toll on shoppers.

Wal-Mart cut its full-year earnings forecast last week, saying its customers are running out of cash by the end of the month, while Staples Chief Executive Ron Sargent said on Tuesday that he was "worried" about the current state of consumer spending.

Clothing chain Tween Brands on Wednesday reduced its full-year earnings outlook, while Ross Stores joined the chorus, cutting its full-year earnings forecast because of "macro economic factors, recent results and projections from other retailers, and our own sales trend that slowed versus plan beginning in mid-July."

Retailers are preparing cautiously for the second half of the year, reducing inventory plans now to try to avoid costly markdowns or price wars later on.

'Caution in Air'

"There's caution in the air," said Marie Driscoll, retail analyst at Standard & Poor's.

While saying it is too early to predict how holiday sales will unfold, Driscoll said that retailers will need to stock the "absolutely right product" this holiday season or expect to have to resort to cutting prices and matching competitors' discounts to win dollars from selective shoppers this year.

The holiday season is a vital one for retailers because November and December can account for 20 to 40 percent of annual revenue.

Last holiday season, the National Retail Federation said holiday sales rose a "modest" 4.4 percent, which was below its initial forecast of a 5 percent rise, after unseasonably warm weather and the slower housing market crimped spending.

The 4.4 percent increase came after U.S. holiday sales rose a healthy 6.1 percent to $435.6 billion in 2005.

In January, the NRF said that it expected the "subdued gains" to continue into the first half of 2007.

It now appears those tepid increases will likely continue into the second half of the year, constrained by high fuel prices, food inflation and a worsening housing market that have put a damper on U.S. retail chain store sales.

"There's significant uncertainty in the macro environment that all companies in the consumer segment are dealing with," said Arnold Zetcher, chairman of women's apparel retailer Talbots.

He made the comment on a conference call with analysts after Talbots reported a wider quarterly loss on Wednesday but affirmed its outlook for the second half of the year.

More Conservative Planning

Retailers are already taking action.

Target said that it is being more conservative in its planning assumptions for the rest of the year and will manage its apparel and seasonal merchandise inventory more carefully. Talbots said it has cut its fall inventory commitments to reduce markdowns and sell more full-priced goods.

Michael Balmuth, Ross' president and chief executive officer, said his company was also trying to carry less inventory.

"I think by doing this, we put ourselves in a much better position to preserve our margins to the degree that we can out there depending on what the environment becomes," Balmuth said on a conference call.

He also said the company was taking "the prudent conservative posture" due in part to worries that competitors, particularly department stores, would slash prices, thereby luring away potential Ross customers.

"It's still early to tell, but on the margin you tend to temper your projections at this point," said S&P's Driscoll of retailers' outlook for the holidays.

"Retailers are sensing what's going on in the overall economy. They're warning analysts and trying to rein us in, and at the same time, they're trying to prepare for probably heightened promotional activity and having less inventory risk."

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