Markets & Finance

Consumer Confidence Crashes


Retailers, prepare to get Scrooged this coming holiday season. Consumers are becoming increasingly pessimistic about the economy as they worry about jobs, the weakening housing market, and high oil prices.

Americans have already cut back on entertainment, eating out, and all sorts of discretionary spending. And the latest figures are telling: According to a report released by The Conference Board on Aug. 29, the organization's consumer confidence index fell to 99.6 in August, from a revised 107.0 in July. This is the sharpest drop since Hurricane Katrina battered the Gulf Coast last year.

The report may signal trouble ahead for consumer spending—and perhaps for the overall economy. Early reports of August retail sales show that shoppers of all stripes are already cutting back, from the lower-income shoppers at Dollar General (DG) to the more affluent who buy their linens and dishes at Williams-Sonoma (WSM).

Since August is generally viewed as a bellwether for shopping trends during the holiday season, these are worrying signs, especially because the holiday sales season is extremely important to retailers. For most retailers, it can account for up to 40% of annual sales and up to 75% of annual profit.

LOWERED EXPECTATIONS. "This could spell trouble," says Lynn Franco, director of The Conference Board Consumer Research Center in New York. "Discounting, sales, and bargain hunting will have to prevail to draw consumers in during the holiday season" (see BusinessWeek.com's video: "Consumer Data Likely to Cut Spending").

Williams-Sonoma, the high-end retailer that operates Williams-Sonoma, Pottery Barn, and West Elm stores, last week slashed its outlook for the rest of the year. The company said it now sees full-year revenue of $3.75 billion to $3.80 billion, revised down from $3.83 billion to $3.90 billion previously. "The guidance reflects the volatile trends that we're seeing today and our increasingly cautious outlook for the balance of the year," says Howard Lester, CEO of Williams-Sonoma.

Chico's FAS (CHS), the boutique apparel chain targeted at high-income boomer women, also warned that its sales at stores open for a year will decline 6%, the first negative same-store sales result in nine years, as traffic into stores declined. "August is a disappointment for all of us," says Scott Edmonds, CEO of Chico's, who lowered expectations for future operating margins for the next year.

FUEL PRICE EFFECT. The difficulties come after several retailers reported weak results in July. Target (TGT), for example, lowered its outlook when it gave its mid-July outlook (see BusinessWeek.com, 7/18/06, "Target: The Canary in the Economy?").

Other studies also point to increased anxiety among consumers. According to a recent national survey conducted by The Boston Consulting Group, over half of lower income and middle income families are eating out less. That's already having an impact on casual-dining spots, with the popular P.F. Chang's China Bistro (PFCB), Applebee's (APPB), and Cheesecake Factory (CAKE) all warning of slowing sales. P.F. Chang CEO Rick Federico says he hasn't seen anything like this for over 15 years. "There have been other ups and downs, but none where the industry is seeing discounts fall across the segment for a prolonged period of time," says Federico.

The BCG survey also found that people were looking for less expensive alternatives, especially in the lower income segments (i.e., people earning less than $35,000). But that hasn't necessarily helped Dollar General, which last week cut its quarterly outlook, citing the effect of high gasoline prices on its lower-income shoppers.

SPREADING UNCERTAINTY. More worrisome, the BCG survey found a sense of uneasiness across income groups. While 64% of Americans with household incomes under $35,000 "often or sometimes worry about having enough money when they put their heads on their pillows at night," the same is also true for 45% of Americans with household incomes between $35,000 and $74,000 and 39% of Americans with household incomes between $75,000 and $99,000. "The energy shocks have been painful," says Michael Silverstein, a BCG senior vice-president and author of the recently released Treasure Hunt: Inside the Mind of the New Consumer.

Such unease and warnings from restaurants and retailers are reflected in the Conference Board's numbers. Consumers' overall assessment of the economy was significantly less favorable in August. Those claiming conditions are "good" fell to 26.1%, from 27.3%. Those claiming conditions are "bad" rose to 16.7%, from 15.0%.

And the outlook for the labor market was sharply negative. Consumers saying jobs are "plentiful" fell to 24.4%, from 28.6%. Those claiming jobs are "hard to get" increased to 21.1%, from 19.6% in the previous month. And this despite the fact that gasoline prices, though higher than last year, have declined 11 cents in August so far.

With all these worries weighing them down, it's hard to imagine consumers opening their wallets wide during the upcoming Christmas season. They may have to make do with other expressions of holiday cheer.


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