Will Holiday Shoppers Be Merry or Miserly?

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Retailers have done an excellent job cutting costs, experts say. Caught with too much inventory last year, they are stocking lighter quantities this holiday season. With less merchandise on the shelves, they should need to offer fewer discounts to unload it. In addition, chains have slashed expansion plans and closed unprofitable stores, Hart says, and have even demanded rent reductions from landlords.

Analysts believe all this cost-cutting will boost profits even as sales remain flat. According to analyst estimates tracked by Thomson Reuters (TRI), consumer discretionary earnings are expected to double in the fourth quarter of 2009 from the previous year.

"The cost-cutting has been aggressive," Unger says. Retailers have "put themselves in a position where they can survive a holiday downturn if there is one."

Survival isn't an abstract question for consumer firms in this economy. Last year's grueling Christmas season drove several high-profile retailers into bankruptcy, including Circuit City.

Expect discounts, meager inventories

If consumer spending does recover unexpectedly, stores could run out of product faster. "If you walk into any kind of store today and you see something you like, buy it," Hill says. "Because it's probably the only one they have."

Retailers may be cautious, but that doesn't mean they won't offer discounts this holiday season. Another lesson learned over the past year, Hood says, is that consumers want good deals. "The consumer is making sure that they provide value," Hood says.

Wal-Mart (WMT) benefited from its reputation as a discounter last year, but now many other retailers are trying to get in on the act, including Macy's (M). Last year "retailers that discounted gained market share," Hart says. Store shelves should feature more gifts and products designed to sell in the $10 to $20 range, he says.

There are still few signs that U.S. consumers are planning to open their wallets wide this holiday season. Given the jobs outlook and a shortage of consumer credit, we're unlikely to see a return to the spending levels of 2007 and earlier.

But with the stock market up and the recession assumed to be over, many are betting that retailers can avoid last year's ruined holiday. Even if sales remain flat, retailers and other consumer-focused firms are at least better prepared.

Steverman is a reporter for BusinessWeek's Investing channel.

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