Retailers threw a holiday party, but no one came.
The latest data on holiday sales continued to confirm what most have been suspecting: it was the worst holiday season for retailers in decades.
The National Retail Federation estimated Wednesday a 2.8 percent decline in retail sales over the holiday season, marking the first decline since the trade group began tracking such figures in 1995.
Meanwhile, the Commerce Department said retail sales in December fell 2.7 percent. The figure was not only worse than analysts' forecast, it showed a worsening trend from the prior month. What's more, revisions were decidedly negative.
Coupled together, these trends suggest consumer spending fell almost as rapidly last quarter as they did in the third quarter of last year and appear to be set to continue to decline appreciably this quarter, said Peter Kretzmer, a senior economist at Bank of America.
"With the trajectory of sales very weak in December, we estimate that consumer spending will decline about 2 percent to 2.5 percent in the first quarter of 2009," Kretzmer said.
This means the shockwaves from these trends will continue to ripple through the sector and the rest of the economy.
Just today, regional department store chain Gottschalks and privately held apparel chain Goody's filed for bankruptcy. The bankruptcy filings are the latest in a series that is not expected to end soon as restructuring experts see a further store closings and bankruptcies in the coming months.
"Look, it's pretty tough with the consumer right now," said Steve Sadove, Saks Chief Executive, in an interview on CNBC. (To listen to the full interview, watch the video above.)
"The holiday shopping season was a difficult season," Sadove said. "The high-end luxury customer has been basically watching their portfolio shrink. They have been frozen in their purchases. You have seen consumption declines that are very substantial. They have been shopping their closets versus the stores. They have been buying on sale versus full price. I think you are going to start to see some of that changing over time, but as this market is in turmoil, I think we're in for a rocky period over the next several months."
One reason for this is retailers will need to take some time to work off the excess inventory, according to Crate and Barrel Chairman and Founder Gordon Segal.
"I think by spring-summer of this year you will definitely see a better supply and demand balance and you will see much less sales," Segal said, also during an interview on CNBC.
"It was the Lehman Brothers collapse that really started everything...it scared the consumer...the consumer now is slowed up," Segal said.
He doesn't expect the consumer to change their behavior anytime soon, but he does expect retailers to react to the new landscape.
"The job of the retailer is to sense the market and buy for whatever that is, and the market going forward is going to be different than the market we had in 2008," Segal said. He expects retailers will need to offer consumers more exciting merchandise at good prices in order to attract their attention.
As for the consumer, it may take much more time for them to become comfortable with spending at the rate they were, he said.
"People have to become comfortable with their balance sheets," he said. "Their home prices have to stabilize, their stock prices have to stabilize. It's not just an income sheet we're looking at, it's a balance sheet - a personal balance sheet - and I think as they feel that, it will start coming back."
Investors in retail stocks are reacting to this new world, said Gilbert Harrison, chairman and chief executive of investment banking firm Financo. They are paying attention to other metrics besides monthly same-store sales reports in order to measure the performance of retailers.
"Comp-store sales mean nothing if you don't know what the gross profit margins are," Harrison said.
Harrison expects innovation is needed to get people to buy again, and investors will be looking for those who are behind those innovations.
"You look at the merchandise and you smile," he said. "You make people feel good about themselves. This is what has to be done, you've got to get the consumers back into the store and feeling comfortable."
With that in mind, the Holiday Central blog is coming to a close for this holiday season. However, given the importance of the consumer to the economy, CNBC.com will be launching a new blog, "Consumer Nation" to track consumers and what they are thinking, to watch retailers and see how they are reacting, and manufacturers to see how they are innovating to make their products appealing in this environment. Look for it soon.
The Post-Holiday BuzzRetailer Goody's Files Bankruptcy, Will LiquidateRetail Sales Slump More than ExpectedGottschalks Files for Chapter 11 ProtectionHoliday Retail Sales Fell 2.8%Too Late? 25% of Stores at Risk for Bankruptcy
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