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|  | NOVEMBER 16, 2004
 MARKET VIEWS By Frank Benassi A Crimp on Holiday Cheer? An S&P survey finds that high energy prices and tough competition are dampening retailers' expectations for the year's peak selling season While the 2004 holiday season promises to be merry for the U.S. retail sector, favorable comparisons with last year's results -- the strongest since 1999 -- will be a stretch. Although Standard & Poor's Ratings Services believes retail prospects remain good, concerns about the economy, geopolitical issues, and energy prices may have a moderately dampening effect on sales for the upcoming season. Last year's holiday sales (November, 2003, to December, 2003) increased a solid 5% over the prior year. We estimate that this year's increase likely will be no better, falling somewhere in the 3.5% to 4.5% range. The critical holiday-sales period typically accounts for about 23% of retailers' annual sales and an even greater piece of their profits. THE RESULTS. We recently polled top retail managers for their views on the upcoming holiday season and their outlooks for next year. The results of our survey indicate optimism for holiday sales, stemming from an improved economic climate, even though recent trends in consumer confidence are not as positive as they were earlier in the year. Compared to last holiday season, 40% of the managers polled expect sales for the 2004 holiday season to be stronger. However, nearly 46% of the survey respondents have a less favorable outlook now for the 2004 holiday season, compared with their outlooks six months ago. First, a word about the survey. An e-mail message containing a link to a Web-based survey recently was sent to senior financial executives at 175 retail companies. Of those, 22 sent back surveys. We believe this number of respondents (almost 13% of the survey base), while fairly small, offers the opportunity for a directional reading of the opinions of the marketplace. Of the 22 respondents, 12 are retailers with more than $1 billion in revenues. On a sector basis, 6 of the 22 respondents are department stores, discounters, and/or supermarket/drugstores; 12 are specialty retailers; and the balance are restaurants. MIXED ECONOMIC SIGNALS. On the economic front, signals for continued consumer spending are a bit less positive, as consumer confidence has declined since very strong June and July Conference Board survey results. Perceptions of an improving job market are vying with concerns about rising interest rates and higher energy costs. Also, same-store sales since May generally were softer than expected, notably at Wal-Mart Stores (WMT ) and Target (TGT ). In a continued trend, high-end retailers continued to significantly outperform the overall sector. A majority of survey respondents (57%) have indicated that same-store sales plans for the 2004 holiday season reflect levels between 2% and 5% higher than last year, while 25% expect sales to be flat or at decreased levels. Consumers continue to lead the economy, despite the drag of higher oil prices. Although households are now spending an average of 5% of after-tax income on energy (up from 4% in early 2002), they have compensated by reducing saving, rather than cutting back on other spending. Consumer spending is expected to rise 3.7% this year (2000 chain-weighted dollars), from 3.3% in 2003. Next year, growth is expected to slow to 3.1%, as the boost from tax cuts disappears and higher oil prices continue to bite. The savings rate is expected to reach a new record low, of 1.2% in 2004, down from 1.4% in 2003. MOOD TO BUY. GDP results for the third quarter of 2004 also reflected retail sales strength, including 4.9% real consumption growth. The domestic deflators appear to have been only modestly affected by the sizable run-up in wholesale energy prices. Consumer spending was extremely strong: it rose 4.6%, as was expected, given the strong retail sales data. We expect sales growth in the fourth quarter to come in slower than in the third, but to clock in at a still-solid rate of 3.8%. Excluding autos, October retail sales rose an impressive 0.9%, and well above expectations of a 0.5% gain. Continued strength is reflected in year-over-year numbers, as total retail sales are up by a strong 8.5% excluding autos. To confirm the buying mood, the University of Michigan reports that consumer sentiment rose to 95.5 in November, the best reading three months, and above the October 91.7 reading and expectations of 92.5. Lower gas prices, improving labor markets, and a postelection bounce helped explain the rise.
BW MALL
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