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Ho-Ho-Horrible: The Moment of Truth Comes for Retailers

It will take a Christmas miracle to save retail this year.

Store traffic has slowed to a crawl, as consumers shut their wallets, caught in the grip of tightened credit, rising unemployment and falling home values.

It is all but inevitable that retailers will see weaker holiday sales growth than last year, according to most assessments. Forecasts range from an estimated 2.2 percent year-over-year sales gain projected by the National Retail Federation, to the far less jolly 6 percent to 8 percent decline, expected by Richard Hastings, a consumer strategist at Global Hunter Securities.

If the trade group’s assessment is correct, retailers will ring up $470.4 billion in sales this holiday season, compared with $460.24 billion last year. But that increase would be far weaker than the average annual sales gain of 4.4 percent the industry has enjoyed over the past ten years.

Many don’t even see that happening.

Estimates for individual retailers have been ratcheted downward. Gifts, even for children, are tending more toward practical items rather than the splurges of Christmases past. Online sales are looking weaker than expected, and consumers are shying away from purchasing gift cardsin order to pick over the heavily discounted merchandise already available.

Bad Or Ugly

Amid these trends, the question becomes: how bad will the bloodbath be for retailers, and what will this mean for the industry’s future?

Just as Sharper Image’s weak holiday sales last year foretold its bankruptcy, the ability for retailers to come out of the holiday season with clean inventories may very well determine their viability. And, many suspect at the end of it all, Circuit Citywill not be alone in filing for bankruptcy. By next holiday season, the retail landscape could look a lot different.

“We’ll see more fallout and shakeout,” says Frank Badilo, vice president and senior retail economist at TNS Retail Forward. “We’ll see more store closings and more acquisitions and mergers as a result...Clearly, for many this is a once in a lifetime situation they need to react to.”

Retail sales have fallen for four straight months, with October’s sales down 2.8 percent. The steep drop-off that began in September suggests the plunge in sales was a shock, Badilo says.

“As I look at it closely, I see it as an immediate knee-jerk reaction to the global financial crisis, and to what extent, it stabilizes and bounces back a little bit as consumers get the lay of the land,” he said.

The contraction has been most pronounced in electronics, apparel and home furnishings.

“What worked in 2007 was affordable quality,” says Jeff Green, president and chief executive of Jeff Green Partners in Mill Valley, Calif. This year, consumers are fixated on price, and many are simply trading down to discounters such as Wal-Mart Stores, he said.

Even the discounts at stores known for value such as Steinmart, TJX Cos’ TJ Maxx and Marshalls units, and Rosshaven’t been deep enough woo to some consumers.

The trade-down factor is baked into the forecast of Global Hunter’s Hastings. He estimates that about 3 to 5 percentage points of his projected decline in sales is tied to the accelerating pace that consumers are switching to less expensive retailers. Without this trend, he may have called for a 4 percent drop in holiday sales growth.

Retailer-Consumer End Game

TNS Retail Forward’s holiday shopping survey showed folks still intend on buying gifts for their family, but they are cutting back on spending, especially on decorative items and non-family members.

Most retailers anticipated a challenging environment this year and planned very lean inventories and many promotions. That means shoppers may not find an enticing selection if they wait too long to buy gifts.

Going out of business
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Going out of business

“The customer will see that the waiting game will not be as viable as last year,” says Ken Hicks, president and chief merchandising officer for JCPenney. “It’s not going to be…as in the past, where the retailers got screwed and had…to mark everything down.”

Having recently overhauled its operations, JCPenney is “well positioned” to weather the current slowdown, says Hicks.

More broadly, he expects consumers eventually will buy.

“One of the things we know, Santa Claus will come,” Hicks says. “People will celebrate the holidays…People have historically felt it’s important to make themselves and their families feel good.”

In that way, there is a creeping concern that retailers may get caught in a self-fulfilling prophecy, with shoppers showing up at stores ready to spend and finding nothing they want to buy.

Wait 'Till Next Year?

Even worse, may be what comes after the holiday season ends.

There is nothing in the spring that can act as a catalyst to spur sales, according to Global Hunter’s Hastings.

One ominous sign is the still unfolding wave of layoffs, which may not fully deal a blow to retailers until after the holiday decorations are packed away.

Another potential minefield that retailers are navigating is the threat of being labeled as a distressed company.

Hastings has seen some evidence that the financial supply chain players are not tightening credit beyond a certain point because of the fear that it is endangering not only their own clients, but ultimately themselves. He has seen cases where retailers with wide credit spreads, which indicate a greater fear of default, are continuing to get a lot of support.

That could give retailers that are teetering on the brink an edge.

“What happens is you get labeled as distressed. You have difficulty buying and difficulty getting credit. Talk about a self-fulfilling prophecy,” says Green.

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