Outlook casts pall over holidays

NATIONWIDE RT REPORT —Holiday season ’08 is shaping up to be a situation where bad results could be considered good, since a large number of economic factors have substantially lowered expectations for sales and profits.

No one is forecasting strong sales this holiday season. The National Retail Federation’s holiday forecast this year sees sales increasing only 2.2% to $470.4 billion. This gain would fall well below the ten-year average of 4.4% holiday sales growth and would represent the slowest growth since 2002, when holiday sales rose 1.3%.

“Current financial pressures and a lack of confidence in the economy will force shoppers to be very conservative with their holiday spending,” said NRF chief economist Rosalind Wells. “We expect consumers to be frugal this season and less willing to splurge on discretionary items.” NRF defines holiday sales as retail industry sales in the months of November and December, which include most traditional retail categories such as discounters, department stores, grocery stores and specialty stores, and exclude sales at automotive dealers, gas stations and restaurants.

The Deloitte retail group defines the holiday season more broadly and includes January in the mix, but even with the gift card redemptions that come after the first of the year, its forecast calls for only a 2.5% to 3% gain. “Higher energy and food prices are making a dent in consumers’ wallets and the dramatic drop in home mortgage refinancings has dried up a substantial source of discretionary funds,” said Carl Steidtmann, chief economist with Deloitte Research.

“In addition, continued softness in the housing market, rising unemployment claims and a volatile stock market are negatively affecting consumers’ perceptions of the economy, their wealth and their ability to spend. In all, these factors will likely lead to a challenging holiday season,” he said.

Others point to recent weakness in the back-to-school season as a precursor to holiday difficulties because historically, there tends to be a high correlation between spending for the two seasons. “As expected, the 2008 back-to-school period showed disappointing results for department stores and specialty retailers,” said Karen Ghaffari, managing director and head of the U.S. retail group at Fitch Ratings. “This is a signal that the crucial winter holiday period will experience weak sales.”

According to Ghaffari, apparel and home retailers will be the most challenged, while essentials such as food and prescriptions are expected to show relative strength, with discounters and warehouse clubs continuing to outperform other formats.

While most of the focus of late is on the negative forces pressuring consumers and clouding the outlook for profitable sales growth, there are a few positive factors in play. For starters, comparison against last year’s results are relatively easy, since the 2007 holiday season was one of the weakest in recent memory. The 3% sales gain in 2007 was the weakest since a 1.3% increase in 2002, according to NRF’s data. Sales growth this year will also benefit from oil-induced price inflation as suppliers have been successful in securing price increases from retailers who in turn have passed them on to consumers.

It is probably a stretch to view easy comparison and inflation as positive factors, but retailers will take what they can get considering how market conditions look right now and existence of negative consumer sentiment. As such, this holiday season promises to be less about growing top-line sales and more about driving profitability through inventory management, expense control and sensible promotions that appeal to value-oriented consumers eager to feel good about something.