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An Early Case Of Holiday Blues


News: Analysis & Commentary: Retailing

An Early Case of Holiday Blues

For many retailers, their big season will be disappointing

It's not exactly a lump of coal. But after two sizzling Christmas seasons in a row, retailers are bracing for a not-so-merry slowdown this holiday season. "The retail world has changed overnight," says Mark M. Zandi, chief economist at economics consulting outfit Economy.com. "Six months ago, it was boom times. Now the environment looks much less inviting."

Sure, consumer confidence is still near record levels, while unemployment and inflation remain low. But higher interest rates on credit cards and some adjustable mortgages, steep gas prices, and a lackluster stock market are expected to take their toll on the freewheeling shoppers of the last few Christmases. What's more, some analysts figure consumers are simply saturated by the glut of products they've bought over the past 18 months. "You've got a consumption hangover," says retail analyst Emme P. Kozloff of Sanford C. Bernstein & Co. The unmerry result: Economist Zandi predicts that retail sales in November and December, excluding autos and gasoline, will grow just 5.1%, compared with last year's spectacular 7.9%. While solid, that would be the slowest pace in three years.SHRINKING GAP. The disparity between winners and losers will be sharply drawn this holiday season. That was apparent in back-to-school results. Onetime retail star Gap Inc. posted a miserable 14% decline in same-store sales for August, while Talbots Inc., a purveyor of classic women's apparel, saw a stellar 18.5% gain. Discounters such as Wal-Mart Stores Inc. and Costco Wholesale Corp. continued to outpace their rivals, while most department stores stumbled. The bottom line: With overall sales growth slowing, the strongest retailers in each category will likely snatch market share from weaker rivals. "It gets down to basic execution, which isn't a short-term project for the holidays," says Kevin Tawes, a portfolio manager at Independence Investment Associates in Boston.

Rapid expansion by retailers in recent years also means increasingly fierce competition for consumers' dollars. And if overly optimistic stores enter the holidays with too much inventory--as some expect--look for a discounting free-for-all. "This will be a very promotional Christmas," predicts Carl E. Steidtmann, economist with PricewaterhouseCoopers. That's likely to mean weak Christmas profits for many stores. Retail analyst Robert F. Buchanan of A.G. Edwards & Sons Inc. forecasts flat or down earnings for the year for nine of the 14 retailers he follows, including Gap, May, and Kmart. "It's ugly, and it is getting worse," he says. That kind of investor sentiment has hammered retail stocks since the spring.

Of course, Santa will still be handing out some treats. And if any one sector looks likely to outpace the pack this holiday season, it's consumer electronics. A wave of next-generation digital products, from digital videodisk players to digital televisions and digital camcorders, are bringing customers into the stores. Further fueling sales, prices on some of these items are coming down. The average price for a DVD player, for instance, has fallen to about $230 from $300 a year ago. Moreover, electronics retailers will get a big boost from Sony Corp.'s launch of PlayStation 2 on Oct. 26, which many expect to be a big hit. Meanwhile, sales of digital phones, direct-to-home satellite television systems, and personal data assistants such as the Palm hand-held computer should remain robust. Analyst David A. Schick of Robinson-Humphrey expects electronics retailers such as Best Buy Co. to be at the high end of the 3% to 5% same-store sales gains he's predicting for retailers in general this Christmas.

If consumers binge on electronics this year, however, it's likely to come at someone else's expense. Consider Verne Glassman, 53, a government contracts administrator in Aurora, Colo. As his gasoline and interest-rate expenses have risen, he and his wife have cut back to eating out once a week, instead of three times. But his appetite for digital products hasn't slowed--he has bought two DVD players, a digital camcorder, and a digital camera in the past year. It's worth spending on those items, he says, because "the quality of the digital image is so much cleaner."

That's one reason discounters and other broad-line retailers are stepping up their efforts to capture more spending on electronics. Target Corp. has added digital phones and Palms. And Sears, Roebuck & Co. expects its growing array of digital products to account for 40% of its electronics sales this season, up from 20% a year ago.

Home furnishings should provide another bright spot. Although housing sales have slowed from their torrid pace of the past five years, there's still plenty of demand for smaller-ticket home goods. Analyst Shelly Hale of Banc of America Securities estimates home textiles and accessories will maintain a 4% to 5% growth rate this holiday season. That's good news for companies like Williams-Sonoma and Pier 1 Imports. "We're doing well in all of our categories across the board," from candles to wicker chairs, says Pier 1 Imports Inc. Chief Executive Marvin J. Girouard.

Still, consumers haven't been as keen on bigger-ticket home items. Both appliance and furniture sales have slowed. Circuit City Stores Inc. is dropping appliances to give more space to its more lucrative electronics offerings. Whirlpool Corp. Chief Operating Officer Jeff M. Fettig expects industry shipments to drop about 2% by yearend."NOT PRETTY." So who's in for a particularly bleak Christmas? Clothing retailers and most department stores, especially those who don't get the mix right this fall. Analysts and consumers also blame a lack of must-have fashions this season, retailers' fixation on clothes that are too risque, and closets already stuffed with the casual attire that most people wear to work. "The clothes just aren't pretty, and if you are slightly older, they aren't wearable," complains Tina Radford, 56, a retired flight attendant from Alexandria, Va.

The stand-outs? Companies like Talbots, Kohl's, and The Limited, which offer consumers the fashions they want at affordable prices. "What people want is good-looking, fashionable, practical clothing that's well made, and they don't want to go broke in the process," says Kurt Barnard, president of Barnard's Retail Consulting Group. Adds Talbots CEO Arnold B. Zetcher: "There's no reason to believe Christmas won't be strong." The company posted same-store sales gains of 16.2% through August, although he admits it will be tough to maintain that pace through the holiday.

High-end retailers should fare well, too. Their upscale clientele still has plenty of money to spend. Chestnut Hill, Mass.-based Neiman Marcus Group posted same-store sales gains of 8% in August and nearly 13% for its quarter ended July 29. A return to dressier clothes is boosting results, says H.W. "Hugh" Mullins, CEO of Neiman Marcus stores.

While news like that will certainly buoy the industry, perhaps the best thing that will come of this Christmas is the gift that it leaves for the next: easier year-over-year sales comparisons.By Wendy Zellner in Dallas, Robert Berner and Julie Forster in Chicago, Louise Lee in San Mateo, Calif., and Bureau ReportsReturn to top


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