Retailers Hit by Worries About Consumer Spending

Cash Register
Paul Sakuma

A surprise decline in U.S. payrolls in August could frighten already jittery consumers into shutting their wallets tight, a move that could push sales down to recession levels during the key holiday shopping season.

U.S. employers cut 4,000 jobs last month, the government reported, the first decline in four years and the latest cause for concern for consumers already on edge from the U.S. housing
meltdown and higher prices for gas and food.

"This number is spooky," Ken Perkins, president of research firm Retail Metrics, said. "This obviously gives you more cause for concern, that's for sure. This is a highly unusual

Indeed, the data sent investors scurrying from many retail names that have held up particularly well in recent years.

High-end stocks like Sotheby's, jewelers Tiffany and Zale, and Nordstrom all fell sharply.

But the bad news spread throughout retail and was not limited to the expensive names.

Clothiers Limited Brands and Liz Claiborne were both off. So were shoe company Brown Shoe, teen faves Abercrombie & Fitch and American Eagle Outfitters and RadioShack.

No Recession Seen Yet

Perkins did not see the U.S. economy heading into a recession just yet, but said more weak or declining jobs numbers would bode "doom and gloom for the holidays," the make-or-break season for many retailers.

In recent years, the consumer has held up well even when other parts of the U.S. economy have wilted. After the Sept. 11, 2001 attacks on the United States, shopping was even
portrayed by some as a patriotic duty.

But as declining home values and higher prices for gasoline and other everyday items have hit consumers, they have already cut back on shopping.
Michael Niemira, chief economist for the International Council of Shopping Centers, said sales at retailers open at  least a year, the closely watched same-store sales number, are
already trending 1 to 1.5 percentage points weaker this year.

If that trend continues, holiday same-store sales would already be right around levels typically seen in a recession, with tepid increases in the 1.5-to-2-percent range, he said.

"Certainly today's employment number raises the specter of recession, raises the specter of an even weaker second half," Niemira said.

Just as important in terms of retailer profits, the jobs report, which also included downward revisions in June and July payrolls, shows an even weaker economy than retailers might
have already expected, analysts said.

Since holiday goods have already been ordered and in many cases are already being shipped to stores, retailers might find themselves having to make drastic price cuts to attract
customers, a move that would hurt margins and profits.

Weakness May Spread

"We are going to see this year more of the weakness spread to nonhome improvement sectors, with apparel stores and other retailers among the harder hit ones," Frank Badillo, senior
retail economist at consulting firm TNS Retail Forward, said.

"I think the risk of a recession is the worst it has been in many, many years," he said, though he added that he did not think the U.S. economy was already in a recession.

Retail Metrics' Perkins said a recession would hit midpriced retailers, but could drive traffic to dollar stores and discount retailers like Target as consumers
trade down.

Perkins thought it would take a much worse decline in the economy to push consumers who typically shop at mid-priced stores over to Wal-Mart Stores in search of lower prices.

Wal-Mart reported a higher-than-expected 3.1% increase in August same-store sales on Thursday, but cut prices by as much as 50% on 16,000 items like school supplies and backpacks to help drive sales.

"You'd have to really see the economy go into the tank quite a bit ... to help them dramatically," Perkins said.