As the holiday shopping season kicks into gear, retailers and industry experts are expressing "cautious optimism," a phrase that has become a ubiquitous stand-in for predicting good news in the current economic climate. Attracting consumers to stores through early promotions and discounts—as well as going into the season with lower inventory levels—are among the tactics retailers are adopting to deal with shoppers, who remain skittish about the future. It's too soon to say if it's working. The U.S. Commerce Dept. is scheduled to report October figures for consumer spending on Nov. 25 amid expectations of a slight bump up from September's 0.5% fall. "We're looking at modest sales increases for the holidays and don't expect the degree of markdowns" that retailers needed to introduce late in the season to move product, says Brian Sozzi, a retail analyst at Wall Street Strategies. Hoping to avoid a repeat of last year's holiday shopping results—often described as one of the worst on record—retailers will likely regard slender or stagnant sales as a success. Recent third-quarter earnings reports from major retailers have showed mixed results. Wal-Mart (WMT)—the world's largest retailer and regarded as a bellwether for the overall vigor of consumer spending—reported on Nov. 12 a revenue increase of 1.1%, while same-store sales dropped 0.4%. Revenue fell 3.2% at J.C. Penney (JCP), the company reported on Nov. 13, while same-store sales dropped 4.6%, although Penney improved its full-year profit and sales outlook with fewer discounted items on offer. October statistics reported on Nov. 13 in the Deloitte Consumer Spending Index, which tracks consumer cash flow as an indicator of future consumer spending, rose in October for the fifth consecutive month, to 4.1%, from September's upwardly-revised 3.6%. The calculation takes into account the tax burden (the percentage of income that one pays in taxes), which has recently been stabilizing; initial unemployment claims, which continue to drop from their March peak; real wages, up almost 5% from a year ago; and real home prices, declining at a slower pace. Signs that spending has stabilized"The continued rise in the index points to a significant improvement in the fundamentals of household financials," Carl Steidtmann—chief economist at Deloitte Research and author of the monthly index—said in a press release. "If these economic indicators maintain their direction, real consumer spending may turn positive before the end of the year." SpendingPulse by MasterCard Advisors, which tracks national retail and service sales, showed some mixed signs of stabilization in its October report, released on Nov. 12. Seasonally adjusted retail sales, excluding autos, were down 1.3%, compared to the same time last year—still in the red, but an improvement from the prior three month's average of 5.8%. Excluding autos, month-to-month growth rates flattened to 0%, after gains of 2.4% and 0.6% in August and September, respectively. Retailers have been adapting their strategies to survive since consumer spending plunged last fall, and many will look to this holiday season as a significant test for how they and the greater economy are faring. One of the biggest problems plaguing the retail industry last year was that inventory levels were severely misaligned with demand. "Coming into holiday season last year, [retailers] had their inventories already set up when the bottom fell out," says Doug Hart, a partner in the retail and consumer product practice at BDO Seidman. As actual sales fell far short of prior expectations—retailers typically place orders for the holiday season by August or September—they had to resort to deep markdowns. This helped move product off the shelf, but deeply cut into their profit margins. This year, inventories are being cut across the board. "Retailers have planned very conservatively for this Christmas season," says Craig Rowley, vice-president of retail practice at consulting firm Hay Group. More than half the retailers that participated in the BDO Seidman survey, or 54%, reported reduced inventories by an average 10% for the holiday season. Brian Sozzi, a retail analyst at Wall Street Strategies, estimates that inventories are down by around 5% at big box stores such as Wal-Mart and Target (TGT), while such apparel stores as Ann Taylor (ANN) have reduced theirs by as much as 20% to 30%. early sales vs. deep discounts laterRowley contends retailers are taking a two-pronged strategy to drive sales this year. They intend to lure customers into stores early, hoping they'll return to do more shopping later, as well as offer promotions early in lieu of steeper discounts later. "Everyone's planning earlier promotions—it would be the exception who's not planning this way," says Rowley. "The No. 1 objective [of retailers] is to try to not have the draconian markdowns from last year. They'd rather give 35% off now than 50% off later." Retailers are getting an early start on strategic promotional discounts to lure consumers into their stores—"earlier in the season than we've ever seen," says Lisa Walters, principal at Retail Eye Partners. If a person comes to buy a sweater on sale, the thinking goes, she might add a blouse and pair of pants to go along with it. Techniques like this that may help them to capture greater market share when holiday budgets wear thin later in the season. Retailers like Sears (SHLD), Amazon.com (AMZN), and Wal-Mart began invoking Black Friday deals weeks before Thanksgiving. Some 96% of chief marketing officers surveyed by BDO Seidman said they plan to offer more holiday promotions and discounts this year, up from 88% last year and 73% in 2007. Can reduced inventories drive sales?The move seems to be working. "Believe it or not, a lot of people have already done their holiday shopping," says Wall Street Strategies' Sozzi. Spreading out holiday purchases means consumers may be less likely to get stuck with large credit-card bills in January and February. Retailers are hoping that word of reduced inventory may help drive consumers into stores early out of concern that they won't be able to find the gifts they want. Despite recent poor performance in the video game sector, for example, game enthusiasts raced to stores on Nov. 10, when Activision Blizzard (ATVI) released its latest hit, Call of Duty: Modern Warfare 2. The company sold a record 4.7 million copies at about $60 retail on the day of its debut in North America and the U.K. Retailers must still walk a fine line with discounts, however. The more accustomed consumers become to sales, the less likely they are to return to paying full price when the economy eventually recovers. This could hurt future business. Consumer expectations and retailers' ability to meet them, however, may already be matching up. Surveying consumers over the last week in October, Walters found that the average level of discounting most are expecting to see currently hovers between 20% and 30%. Compared to last year—when sales of 40% to 60% off were extremely common—"that's very much in line with what retailers can do this year and still achieve profitability," she says. "That's a good sign for retailers."
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