'Tis The Season To Be Gloomy

With shoppers spooked by the slowing economy, sales are slipping

It seems only fitting that the new movie The Grinch is a hit this holiday season. For retailers, at least, a lot of Grinch-like forces seem poised to steal the holiday cheer. In the face of soaring energy prices, a volatile stock market, and higher interest rates, many retailers and analysts are lowering their holiday expectations--and earnings forecasts--faster than the Grinch's sleigh can zoom down Mt. Crumpet.

The only question remaining is whether the holiday shopping season will be merely mediocre or downright rotten banana peel ugly. Retail stores across the country are telling the same downbeat story: Folks are getting spooked by the slowing economy, sales won't be what they were last year, and there isn't even a hot-selling toy that parents are clamoring to buy for their kids. A.G. Edwards analyst Robert F. Buchanan estimates that same-store sales for the 25 large retailers he follows will grow a miserly 2% to 3% for November and December. The growth rate has slowed steadily since hitting 6.5% last summer. All told, warns Carl E. Steidtmann, an economist at PricewaterhouseCoopers, retail sales excluding autos and gasoline will likely grow just 4.5% in the fourth quarter ending in January. That's the slowest pace since 1995 and far below the blockbuster 8.9% pace a year ago.

EQUAL OPPORTUNITY. By all accounts, this season is shaping up to be an equal-opportunity slowdown, hitting both upmarket chains and their more economical cousins. On Nov. 20, upscale retailer Neiman Marcus Group Inc. warned that it would show a same-store sales decline in November and low single-digit growth for the quarter. "All categories [of merchandise], both low-end and high-end, are dropping off," says Neiman Marcus Stores CEO H.W. Hugh Mullins. The company's stock dropped 18% on the news. Meanwhile, discounter Ames Department Stores Inc. faces a similar problem. Same-store sales started dropping this fall following 7% gains for the past two years. Says CEO Joseph R. Ettore: "For whatever reason, people have gotten more cautious."

But bad news for retailers could mean great deals for bargain hunters. Analysts expect retailers to gain market share with deep discounts and costly promotions. Sears Roebuck & Co., for one, says it will have more promotions and will run them earlier in the season, particularly on items that are normally discounted after Christmas, such as large appliances. Ames is peddling a $38.88 videocassette recorder in its holiday ads. That helps explain why John M. Cavalier, a dockworker for Yellow Freight in Woodridge, Ill., expects to spend 50% more this holiday, mostly on electronics and high-tech gear for his parents, kids, and other relatives. "Price is what's governing what I buy and where," he says. Adds analyst Buchanan: "I've never seen so many pages of advertising and so many sales through the entire store as I'm seeing this holiday season."

To be sure, the Grinch won't do in Christmas. Despite lower same-store sales projections, "we continue to believe the customer has liquidity, inflation is still nominal, interest rates are stable, and unemployment levels remain low," says Wal-Mart Stores Inc. CEO H. Lee Scott. And though consumers are less confident about the economy than at the start of the year, "even now, they're more optimistic than they have been any time in the prior 50 years," says Richard T. Curtin, director of the Surveys of Consumers at the University of Michigan.

Even so, that optimism seems to be getting a bit more subdued by the day. Deborah Schram, a marketing manager at her family's Schram Auto Parts business in Waterford, Mich., says uncertainty about the Presidential election and fear of rising interest rates and gas prices has her spending on hold. "I'm buying practical things instead of luxuries and silly things," she says. That means skirts and jeans for her daughters rather than novelty slippers that they'll wear once or twice. Donna McFadden, an advertising executive in Atlanta, says she, too, is feeling the pain of higher gas prices and is worried about a recession. "Everything is at a standstill for me right now. I would have started my holiday shopping already, but I'm going to wait a little bit," she says.

HUNKER DOWN. Little wonder that many retailers are hunkering down. Wal-Mart, for instance, is cutting $1 billion from its inventories this year to help fuel its expansion plans in a slowing retail environment. The chain is now forecasting same-store gains of 3% to 5% for the fourth quarter, down from 4%-to-6% forecasts earlier in the year. Likewise, apparel chain American Eagle Outfitters Inc., though hoping to do better, is figuring on sales growth in the low single digits for the fourth quarter, despite a strong 6.8% same-store gain in the third quarter. Says analyst Jeffrey M. Feiner of Lehman Brothers Inc.: "Retailers are less pie-in-the-sky-oriented than they used to be and much more pragmatic."

With such measly gains, 'tis the season for a brutal market-share battle. Those retailers with the lowest costs, best prices, and smart merchandising will be the likely winners. Analysts expect value players such as Wal-Mart, Target, Costco, and discount department store Kohl's to lead the pack. "You do have a more price-conscious customer," notes Stephanie Hoff, senior retail analyst at Banc of America Capital Management. She looks for lower-priced items, such as books and music, and "small indulgences," such as candles, gift foods, and fragrances, to be among the season's best-sellers.

Apparel, too, could benefit from a customer who's going back to basics. After missing a shift to more body-conscious clothing in the second quarter, American Eagle says it's now benefiting from strong sales of clothing that includes stretch fabrics, denim in slimmer cuts, and ribbed sweaters in intense colors such as periwinkle and turquoise. At the Macy's West division of Federated Department Stores Inc., CEO Jeremiah J. Sullivan says men's and women's sweaters and outerwear, especially leather, are all selling well, helped by the cold weather.

Toys and electronics, the usual holiday stalwarts, could be among the more disappointing retailing sectors this Christmas season. There's no Pokemon craze, Gameboy, or other must-have toys to drive sales. And the wildly popular Sony PlayStation 2 game console will remain in short supply until early next year, thanks to Sony Corp.'s component shortages.

The consumer electronics category could post decent sales gains, thanks to continuing robust demand for videodisk players and digital televisions and cameras. But the growth is likely to come at the expense of profits because of deep discounting led by players such as Wal-Mart and Target Corp., which have expanded their electronics offerings. On Nov. 9, electronics chain Best Buy Co. warned that third- and fourth-quarter earnings would fall well short of analysts' expectations.

Not all electronics retailers are worried. RadioShack Corp.'s CEO, Leonard H. Roberts, predicts that his company could show double-digit sales increases in November and December "without having a fire sale." He cites insatiable demand for wireless phones, DVDs, direct-to-home satellite systems, and other gadgets. Roberts figures that the chain is grabbing share from competitors because customers can get better service and selection from "a pure-play digital specialty retailer" that doesn't carry appliances and apparel. "We're going to have the greatest year in the history of our company," says Roberts.

Still, for most retailers, such optimism is unfounded. They're getting ready to fend off the Grinch and are even writing their wish list to Santa for Christmas 2001: a Federal Reserve Board rate cut and lower oil prices. Hope for a better next year is what passes for optimism this holiday season.

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