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Why Retailers Can Expect a Poor Christmas

Morgan Korn
Thursday, 4 Oct 2012 | 1:38 PM ET

September same-store sales beat Wall Street expectations but the increase in purchases did little to quell concerns that consumers are cutting back on clothing and accessories. Research firm Retail Metrics said sales jumped 3.9 percent last month; the majority of analysts were forecasting a gain of 3.7 percent. Retail Metrics tracks 20 retailers, excluding drugstores. September sales trailed off mid-month as the annual back-to-school shopping season ended. Sales at department stores rose 1.4 percent last month compared to a 5.6 percent increase in specialty-apparel chains and a 4.3 percent rise at discount stores.

Sales at TJX Cos. (TJX) climbed 6 percent last month, Macy's (M) rose 2.5 percent, Kohl's (KSS) said sales fell 2.7 percent and Gap (GPS) sales rose 6 percent. High-end department store Saks (SKS) said in August that it would stop reporting monthly sales reports.

Veteran retail watcher Howard Davidowitz of Davidowitz & Associates says September's sales numbers were a mixed bag — much like the economy. In an interview with The Daily Ticker, Davidowitz argues that consumer spending will continue to drop off until lawmakers seriously tackle the nation's fiscal problems and the so-called fiscal cliff.

"You're going to see ripples" in the high-end consumer, he says. "Even though capital markets remain strong, wealthy people are very concerned about what's going on and are pulling back a little bit. They get very nervous about the fiscal instability of our country."

Davidowitz points to the recent warnings by luxury retailers Burberry (BRBY.L) and Tiffany (TIF) as evidence that wealthy shoppers are cutting back. Burberry announced last month that sales at its stores open at least one year were flat in the third quarter and it was seeing "a deceleration in recent weeks." The British retailer told analysts that profit would be "around the lower end of market expectation" through March 2013. Tiffany, the 175-year-old jewelry retailer, gave its own dire forecast in August, lowering its sales and earnings projections for the second consecutive quarter. Tiffany said it was expecting a less than stellar holiday quarter because of a weak global economy.

The latest government data has shown a resilient U.S. consumer, one who has even become more optimistic about the job market and the economy. The Conference Board said consumer confidence rose to 70.3 in September from 61.3 in August. Auto sales last month reached a 4-year high and U.S. home prices are starting to increase, an auspicious sign for the still-depressed housing market.

Related: U.S. Auto Sector Is Gradually Improving: Volkswagen Group CEO

But an 8.3 percent unemployment rate and high gasoline prices have continued to crimp spending and there are genuine fears that the U.S. economy could tip back into recession next year. The economy expanded at a 1.3 percent annual rate in the third quarter and consumer spending accounts for 70 percent of that growth. Davidowitz says retailers cannot continue to report big profits when the economy is barely moving.

"If the data wasn't mixed we'd have a guaranteed recession," he says. "If GDP increases 1.3 percent, you're going to have a poor Christmas."

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