For Retailers, Holiday Season Has No Place To Go But Up

• Marilyn Much
• On 6:46 pm EDT, Wednesday October 21, 2009

Retailers won't uncork much champagne this holiday season, as worries over jobs and the economy likely will take a lot of the cheer out of gift buying.

But at least things won't be as gloomy as they were a year ago, when leading U.S. retailers suffered their worst Christmas since at least 1970.

Business has already picked up heading into the holiday season. Last month, same-store sales at leading U.S. retail chains rose 1.1% vs. the prior year, says Ken Perkins president of Retail Metrics. It was the first monthly gain since August 2008.

It also looks like leading retailers' earnings will grow this quarter after nine straight quarters of declines, Perkins says. He estimates that chains are set to see Q3 earnings grow 23.6% vs. 2008. Last year, Q4 earnings sank 26.6%.

Meanwhile, analysts expect retailers' Q4 same-store sales to rise 0.7%, says Jharonne Martis, director of consumer research at Thomson Reuters.

Flat Christmas

But holiday shoppers aren't likely to give stores much of a boost.

Overall Christmas sales should slip 1% to $437.6 billion, says Rosalind Wells, chief economist at the National Retail Federation. That's far better than 2008's 3.4% drop, but nothing to write home about.

It would be the first back-to-back decline in holiday sales since 1992, when the NRF started tracking such figures.

"The Grinch won't have a starring role this Christmas, but he will be lurking in the background," Perkins said. "There are still significant head winds to consumer spending this year."

Those head winds include rising unemployment, which recently hit a 26-year high of 9.8%. Other worries include stagnant home values and burdensome credit card debt.

On the bright side, retailers face easy comparisons with last year's grim results.

"I would anticipate an improving, though still challenging, season," said Michael Niemira, chief economist at the International Council of Shopping Centers.

He figures Christmas same-store sales will rise 1% from a year ago. That's not much of an increase, but it's at least better than last year's woeful 5.8% decline -- and better than what retailers saw for much of 2009.

"As with most recoveries, the retail recovery has been very uneven and very sporadic," Niemira said. "We're starting to see numbers on the positive side."

He also expects the consumer mood to improve as the holiday season approaches.

Q3 GDP data out next week will confirm that the recession is over, which should have a favorable impact on consumer confidence.

Also on the plus side, the stock market rally has helped some consumers increase their net worth.

Marshal Cohen, chief industry analyst at the NPD Group, expects consumers to come out of hiding over the holiday as they give in to pent-up demand.

"The consumer, who hasn't shopped all year, is starting to show signs of life," he said.

Lean Budgets, Inventory

But overall, shoppers will keep budgets tight this Christmas. Consumers plan to spend an average of $682.74 on holiday gifts this year, according to an NRF survey conducted by BIGresearch. That's down 3.2% from last year.

Retailers are keeping inventories tight as well. Doing so makes it less likely they'll have to slash prices to clear out unsold goods -- a move that devastated the industry last Christmas.

This year chains will need to offer discounts of 35% to 40% to drive traffic, Perkins says. That's far less than the 70% off deals they offered last Christmas.

Wal-Mart (NYSE:WMT - News) has continued its aggressive holiday pricing this year. On Sept. 30, the world's biggest retailer started selling more than 100 popular toys, such as Barbie Cut and Style Rapunzel doll, at $10.

The next day, rival Target (NYSE:TGT - News) began offering discounts of up to 50% on popular toys such as Barbie Fashion doll, which goes for $5.

Wal-Mart, Target and Amazon (NasdaqGS:AMZN - News) have begun a high-profile online book price war, offering a few key titles for pre-order at about $9.

Wal-Mart on Wednesday began offering weekly deep savings events and new everyday prices on thousands of items through the holidays.

Holiday consumers likely will continue their quest for bargains at value retailers. In the NRF survey, more than half of shoppers said sales and price discounts or everyday low prices would be the most important factor when deciding where to shop at Christmas.

"We're still seeing shoppers very deal focused," said Frank Badillo, senior economist at Retail Forward. "They continue to trade down in terms of brands and the store types."

Dollar stores and discounters will rule the holiday, as they have all year.

Analysts polled by Thomson Reuters estimate the big winners will include off-price clothier Ross (NasdaqGS:ROST - News), with a projected 5.6% same-store sales gain during Q4; and off-price retailer TJX (NYSE:TJX - News), with a 5.4% rise.

They expect Dollar Tree's (NasdaqGS:DLTR - News) Q4 comps to rise 4.7%, and Family Dollar's (NYSE:FDO - News) to climb 4.2%.

Even department stores might rebound from recent depressed levels. High-end chains, such as Saks (NYSE:SKS - News) and Nordstrom (NYSE:JWN - News) could show modest improvement, Perkins says.

Also, while unemployment continues to move higher, weekly jobless claims have come down sharply from their peak earlier in the year.

"That foreshadows improvement down the road, though it may be another six months before we start to see job growth and the rate starting to fall off," Badillo said.

Buzz up!