Santa's Feeling Strapped This Year

Retailers across the country are bracing for what could be a cheerless season

There are plenty of reasons to be nervous heading into this holiday shopping season if you're a retailer. Consumer confidence fell in October for the third month in a row. Income growth is sluggish. Energy prices are soaring. No surprise, then, that the winter gift-buying season, when retailers traditionally book most of their profit for the year, is looking less than jolly. Sales at stores open at least a year will increase a modest 3.5% in November and December, down from 4% last year and well below the 5%-plus growth rates of the late '90s, estimates the International Council of Shopping Centers. "It's going to be tough," says Coach Inc. (COH ) CEO Lew Frankfort.

So what are retailers doing to prepare for a possibly slow holiday season with perhaps too few must-have gift items? Mostly they are digging in against their customers, keeping inventories at near-record lows in an attempt to avoid the heavy discounting that in recent years has cut into profits and hooked consumers on the 40%-off sale. This strategy is not without risk. If consumers are poised to spend more than many expect, stores could run out of popular merchandise, forfeiting sales. That could hammer profits as much as heavy discounting. Last year sales at retailer Talbots Inc. fell short because it ran out of some hot-selling styles and colors.


Retailers catch a few breaks this year. The crucial stretch between Thanksgiving and Christmas, when most gift buying happens, includes two more shopping days than it did last year. Many retailers are also counting on increasingly popular gift cards to keep cash registers busy. About 60% of time- and idea-strapped shoppers are expected to buy cards this year, up sharply from 45% in 2003, says research firm Bernard Sands LLC. When recipients redeem cards, they tend to spend more than the face value.

Though not as sexy as coming up with a blockbuster new product line, retailer focus is on inventories as never before. Overall, stores at the end of August had 1.36 months of inventory on hand, down about 2% from a year ago, according to government figures. That's near a historic low. Why the drop? Credit the use of new whiz-bang software designed to help retailers improve how they time deliveries and decide when to cut prices to clean out shelves. Gap Inc. (GPS ), which says inventory is about the same as it was a year ago, recently installed software programs that help it plan markdowns. Casual Male Retail Group Inc. (CMRG ), the 500-store men's chain, has spent $8 million upgrading its systems to avoid stocking too many of the wrong sizes and too few of the right ones.

The combination of such software and low inventories means many chains can hope to feel less pressure to slash prices as the holiday season gets under way. If consumers want hot items like faux fur shawls, MP3 players, and plasma TVs, they may have to buy early, and at full price, if they want to buy at all.

Still, that hardly means there won't be markdowns: They may just come later. With many shoppers conditioned to wait longer for sales, analysts say they're inevitable. "I think retailers will hold out and then discount like mad," says Claire A. Gallacher, an analyst at investment bank Caris & Co. If a few big retailers break down and start running deep discounts early, others will be forced to follow. A chain reaction could generate welcome savings for shoppers -- and foil the best-laid plans of store execs.

Corrections and Clarifications A report on the holiday shopping season, ("Santa's feeling strapped this year," Marketing, Nov. 8), should have noted that Coach Inc. CEO Lew Frankfort is upbeat about his company's outlook and that he was referring to the general retail climate as "tough."

By Louise Lee in San Mateo, Calif., with Robert Berner in Chicago

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