Bells Are Ringing for Retailers

The early signs are for a good -- if not great -- holiday shopping season. After that, though, consumers may put on the brakes

By Amy Tsao

It never fails. As the holiday season approaches, market watchers and investors start fretting about consumers' state of mind. Will they keep spending? What will sales receipts look like in the key gift-buying months of November and December?

This year, however, the angst is lower because all signs point to 2004 holiday cheer for the retail sector. Richard Hastings, sector analyst at Bernard Sands, a New York City retail credit-rating firm, predicts merchants will have a "moderately jolly" holiday season. He expects sales for November and December to rise by 4.75% to 5.25% from 2003 levels. While that's a healthy increase, it doesn't top 2003. During the same months last year, sales rose by a handsome 7.6%.


  Still, analysts are optimistic. For one, this year has two more shopping days between Thanksgiving and Christmas than in 2003. More important, even with the multiple pressures of a Presidential election, rising fuel prices, terrorism worries, and a so-so jobs market, consumers haven't closed their wallets. "We haven't seen any really ugly numbers with respect to consumer spending," says Eric Jemetz, senior equity analyst at New York City asset-management firm Rockefeller Partners.

However, consumers won't have tax cuts this year to put extra cash in their pockets, as in 2003. So low-end shoppers are definitely not as flush as they were a year ago. But the best proxy for spending among working-class Americans suggests a decent season. On Oct. 30, Wal-Mart (WMT ) said U.S. sales at stores open at least a year (or same-store sales) rose 2.8% in October, which is regarded as a good harbinger for holiday spending, Jemetz says.

The other signs of merriment? Let's take a look:

Retailers are promoting early.

For all the evidence that consumers are becoming savvy, last-minute bargain-hunters, retailers have been trying to lure them into stories even earlier this season. Hastings observes that mass-merchandiser Target (TGT ) and off-price chain Big Lots (BLI ) already have their Christmas merchandise out on the shelves and are promoting goods normally reserved for the post-Thanksgiving stretch.

By keeping inventories lean last Christmas, merchandisers conditioned shoppers with a hard lesson: If you see something you like, buy it now, because it may not be restocked.

Low interest rates are keeping homeowners liquid.

Even though the Federal Reserve is slowly ratcheting up its benchmark rate, overall interest rates are still quite low by any historical measure. As a result, "borrowing remains very healthy," Hastings says. Home refinancing is still providing plenty of liquidity for many households. The latest reading on outstanding home-equity credit was $415 billion, Hastings adds. And that number should rise even further.

Borrowers are still spending.

Who cares about savings when you have a credit line? Americans are showing no signs they will slow their credit-card purchases. "There's not enough [bad news] to stop them," Hastings says. "The energy crisis is not severe enough yet to derail the entire economy."

The personal savings rate was a meager 0.2% in September. This measure of consumer health has been falling for years, but it continues to have little bearing on spending and shouldn't hurt the holidays.

Luxury spending stays strong.

Just like last year, the outlook for the upper rungs of the economy is cheerful. Hasting says expensive electronics and entertainment gifts will remain popular. That should boost stores like Best Buy (BBY ) in the quarter. Leather-accessories retailer Coach (COH ) should also turn in impressive sales, though like many on the high end, it's holiday 2003 same-store sales will be tough to beat, Jemetz says.

Christmas comeback stories abound.

Sales for many retailers slipped in 2003's holiday quarter. That makes for some natural comebacks. One turnaround that seems to be converting skeptics is teen apparel retailer Abercrombie & Fitch (ANF ). "They seem to have regained their mojo," Jemetz says. It won't be hard for Abercrombie to beat weak sales in the year-ago period. Same goes for teen retailer Hot Topic (HOTT ) and mid-level department-store chain Kohl's (KSS ).

Online retailers see another record season.

Despite the ups and downs of recent Christmases past, online growth has had a clear trajectory. Sales have soared to new heights every year since the late '90s. and that won't stop in 2004.

Online sales for the months of November and December will reach $21.6 billion in 2004, up 19% from the same period in 2003, according to a new report by e-commerce market researcher JupiterResearch. That trend could get turbocharged this season if the cost of filling a gas tank to go to the mall remains high, Jemetz says. The lack of a sales tax for online purchases also gives spendthrifts a reason to buy in cyberspace.

Pure e-tailer (AMZN ) should have another excellent holiday quarter, according to a consensus of analysts. Of note: Shares in e-commerce comparison site (SHOP ) are off to an excellent start since filing its initial public offering on Oct. 26.

What's not to like? Michael Gregory, senior economist at Nesbitt Burns, the Bank of Montreal's equity division, worries about a serious bout of the post-holiday blues setting in after the celebrations are over. He's concerned that "the economy is losing some momentum here." If it's a really cold winter, big heating bills will pressure already vulnerable consumers across the board, he says. Hastings is even more dreary: "My outlook for 2005 is very negative."

Yes, holiday spending could be flush in 2004, but retailers may get some lumps of coal soon enough.

Tsao is a reporter for BusinessWeek Online in New York

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