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It's a make-it or break it time for retailers. The holiday selling season is always a critical time for retailers, but this year this may be even more true. With several retailers already falling victim to a drop in consumer spending, and filing for bankruptcy, retailers will be navigating through some tricky waters. Consumers are strapped for cash due to high energy and food prices, and unemployment is rising. The recent credit crunch has made it more challenging for retailers and consumers to borrow.

This blog will look at the winners and losers in the retail space. Who has the right strategy to capture consumer dollars? It also will look for trends in consumer spending and how that will impact the economy.

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Nov.13

4:34 PM ET

Thursday, 13 Nov 2008

Why You Should Worry About Weak Holiday Sales

Posted By:Christina Cheddar Berk

Topics:Stock Picks | Stock Market | Consumers | Retail Sales

Sectors:Retail

Companies:Wal-Mart Stores Inc

If you think the stakes are different this holiday season, you are not alone.

holiday shoppers
AP
Holiday shoppers outside Macy's in New York City.
Most of the rules retailers have followed in past holidays are being "ignored or revised," said Global Hunter Securities Consumer Strategist Richard Hastings, in his grim holiday consumer forecast.

Hastings is calling for retail sales to contract between 6 percent and 8 percent year-over-year due to a confluence of forces, sending shockwaves throughout the global economy.

Chief among the factors contributing to this are the availability of less inventory for sale, a massive contraction in spending capacity, and a sudden drop in the price level for consumer goods. All will combine to reduce sales to a much greater degree than was expected three months ago, Hastings said.

His outlook is far bleaker than National Retail Federation’s projection, which calls for a 2.2 percent increase.

To hear Hastings' analysis of Wal-Mart's earnings, click here.
To learn more about the trade down to Wal-Mart, watch this video.

Hastings has noticed some specific trends that back up his forecast. Perhaps the most important one is the accelerating pace at which consumers are switching to less expensive retailers such as wholesale clubs and Wal-Mart Stores [WMT Loading... () ]. As these stores continue to try and gain market share against their competitors, they will be driving prices lower and lower. Hastings estimates that about 3 to 5 percentage points of his projected decline in retail sales will come from this trend alone. Without this, he may have called for a 4 percent drop in holiday sales growth, he said.

Other key factors that Hastings cites for his forecast are the collapse of home equity as a source of collateral and credit; the explosion in energy prices; the severe dysfunction in inventory and credit; and the rapidly unfolding wave of layoffs that could easily hit 1 million during the holiday period.

Also, “luxury shoppers are running away faster than the value part of the industry, suggesting that landscaping crews thrashing away at weeds and leaves could be working for unemployed homeowners that just recently were high-paid financial services professionals,” he said.

Hastings also expects gift card and online retail sales to disappoint this year.

“Although many survey respondents say they are increasingly going to give gift cards to others, we believe the underlying fundamentals will reduce the funding of gift cards compared to Holiday 2007,” he said.

More Retail News:

In addition, just as mall traffic fell off a cliff in September, online retail sales also have slowed, he said.

According to researcher ComScore Networks, third-quarter online sales fell to a sluggish 6 percent growth rate, far below the prior trend of 20 percent to 30 percent growth.

Meanwhile, Hitwise, another research firm that tracks Internet trends, said online retail traffic has been declining steadily heading into November. Hitwise said traffic was up year-over-year until early September when it began to decline.

And if all this isn’t enough, Hastings expects there to be ripple effects as internal demand in the U.S. hurts Asia, thus impairing those countries' ability to purchase sufficient quantities of U.S. Treasurys. He foresees that U.S. government interventions and bailouts will add to the market’s dysfunction, and a bear market in Treasurys will begin and spread to corporate debt. This will mean that equity markets will need to deal not only with the current crisis, but with the next one: a bear market in bonds.

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