A Ho-Hum Holiday for Retailers

Despite a flat-panel TV here and an Elmo there, dull retail sales appeared to be the norm this season, and retail stocks remained flat

The joy of the yuletide season didn't carry over into retailing as consumers appeared cautious on the final shopping weekend before Christmas

Some say the U.S. consumer's wallet may be getting a rest, especially with an anemic housing market and gas prices that have been creeping back up in recent months, making people think twice when it comes to expenditures. "The consumer is showing signs of tiring" says Barry Ritholtz, chief market strategist for Ritholtz Research and blogger of "The Big Picture." "A lot of the purchases that took place were people taking advantage of discounts and buying things for themselves."

Retail sales rose only 3% compared to the 2005 season when adjusted for the extra shopping day in 2006. During the 2005 holiday season sales increased by 5.2%, according to MasterCard's (MA) SpendingPulse.

That wasn't the only retail snapshot that recorded a slowdown.

Avoiding the Crowds

ShopperTrak RCT, a Chicago researcher that tracks retail sales, reported initial estimates on Dec. 25 that suggested holiday retail sales dipped below expectations—up 4.3% so far this season, compared to the 5% forecast (see BusinessWeek.com, 12/26/06, "Retail Results Signal Tough Times Ahead").

"It's possible that consumers may have responded to the anticipated large crowds on 'Super Saturday' and pushed to get their shopping done earlier in the week, or simply taken pains to avoid crowded malls altogether," said Bill Martin, co-founder of ShopperTrak, in a press release on Dec. 25.

Online retailers weren't spared in the market either. Amazon.com (AMZN) fell 1.1%, to $39.80, on Dec. 26, despite the Seattle company's declaration in a press release the same day that "the 2006 holiday season finished as its best ever." On its busiest day, Dec. 11, Amazon had orders for more than 4 million items. As part of a promotion this season, Amazon sold 1,000 Xbox 360s in 29 seconds and 1,000 Axion portable DVD players in 34 seconds.

Electronics Price-Slashing

The disappointing results came even as retail heavyweights like Wal-Mart Stores (WMT) battled to keep sales up by offering hefty discounts on products like flat-panel TVs. Weeks before Thanksgiving, retail giants had started duking it out for customers and dropping their prices on products such as high-definition TVs. Wal-Mart even offered 42-inch, flat-panel, high-definition TVs for $998 (see BusinessWeek.com, 12/13/06, "Static Ahead for Electronics Retailers").

The electronics chain Circuit City Stores (CC), which investors had already seen as particularly vulnerable to the price war this season because it is spending on new services, dropped 0.2%, to $19.92. But rival Best Buy Stores (BBY) wasn't immune either and sank 1.4%, to $49.23. Both have profited less on their sales this year (see BusinessWeek.com, 12/19/06, "Circuit City Loses Money Amid Price War").

"I've been doing this research for years, and this is the first one I've seen where there was no hot category," said Britt Beemer, the founder of the consumer-behavior marketing firm America's Research Group. High-definition televisions were big the weekend after Thanksgiving, but they were gone in minutes. The PlayStation was gone in hours. The new Tickle Me Elmo didn't survive as a hot-ticket item the whole season either, he said. "Retail has really struggled, I think, to understand where the consumer is today," Beemer said.

But Beemer did find that a few retailers were winning in each category. As of Dec. 17, he found that companies that managed to draw more shoppers this year compared to last included Wal-Mart, Best Buy, Target (TGT), and Toys 'R' Us. J.C. Penney (JCP) and Sears (SHLD), on the other hand, saw their market share of shoppers decline from 2005.

Wal-Mart shares slid 0.2%, to $45.45, in early trading, but recovered to close up 1.3%, at $46.11. Shares of the rival Target initially fell 1.1% but then regained some ground and closed down 0.4%, at $57.09. Penney stock fell 2.3%, to $77.74, while Sears slipped 0.7%, to $166.63.

"The problem with these holiday sales is—and every year we see this—you get these very aggressive forecasts in the beginning of the year," says Ritholtz. "The expectations get raised so high that even a half-decent Christmas is disappointing."

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