Will Holiday Shoppers Be Merry or Miserly?

With so many jobless consumers, many retailers are prepared to endure another weak holiday selling season. But some analysts have turned optimistic

By Ben Steverman

For retailers and consumer-focused businesses, it's now time for what Mattel (MAT) Chief Executive and Chairman Robert Eckert calls "the early fall jitters."

The 2009 holiday season is approaching quickly, and with nearly 1 in 10 Americans officially out of work there are plenty of reasons to be worried. As merchandise is being shipped to them, stores have no guarantee that shoppers will show up to buy. Fears are heightened by memories of last year's disastrous fourth quarter.

"We're coming off probably the worst holiday season in memory," says Doug Hart, a partner in the retail practice at BDO Seidman, an accounting and financial services firm.

Holiday retail sales dropped 3.8% last November and December, reflecting consumer panic as the U.S. navigated through an unprecedented financial crisis.

Although many economists believe that the U.S. economy ended its recession during the summer, few expect consumer spending to bounce back. The National Retail Federation predicts holiday sales to fall a further 1% this year. After almost two years of recession, Americans have less money to spend. For retail analysts such as Wayne Hood at BMO Capital Markets, "Real income growth is the most important driver."

Consumers still cutting back?

Retailers know this and are being cautious. "Retailers continue to be reluctant to make inventory bets and it will undoubtedly be a difficult holiday for parents whose job status and financial well-being are uncertain," said Mattel's Eckert, speaking to analysts after the toy giant announced quarterly results on Oct. 16.

Various surveys back up the contention that consumers remain gloomy. In a survey released by the National Retail Federation on Oct. 20, consumers said they plan to spend an average of $682.74 on holiday-related shopping this year, a 3.2% drop from last year. Mattel's rival Hasbro (HAS), told analysts on Oct. 19 that its surveys showed most consumers planning to spend at last year's levels—with a quarter intending to spend less and only about 10% contemplating an increase.

Notwithstanding the pessimism hanging over the holidays, many experts and investors sound increasingly optimistic.

"We see consumers ready to come back out again," says Mike Unger, managing director at Karabus Management, a subsidiary of PricewaterhouseCoopers that specializes in advising retailers. Tired of the recession, shoppers want to go back to stores and hunt for bargains, Unger believes.

Recent data have given small reasons to be optimistic. In September, U.S. retail sales excluding autos ticked up 0.5%, following a 1% rise in August.

But predicting the mood of the American consumer is more art than science.

Retailers are on their toes this year

"You never want to underestimate the consumer," says Kelli Hill, a portfolio manager and analyst at Ashfield Capital Partners. Americans like to spend money, she notes, and they've stopped doing so for the past year. "There's just a lot of pent-up demand," she says. Americans might not be able or willing to run up their credit cards, but they're starting to realize the recession is over. So they will think: "'Let's enjoy the holiday.'"

There's even evidence that retailers might enjoy the holiday. Consumer-focused firms were stunned by last year's sudden crisis, and then profits plunged. This year they are better prepared for surprises.

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