Headline: Blaming the economy, retailers plan for a rather ‘Bah, humbug’ Christmas; Will it be the worst holiday shopping season in 10 years?

Source: Wall Street Journal, 21 August 2001

URL: http://www.msnbc.com/news/616946.asp

This Christmas could be even bluer than last. Though it is only August, retailers are bracing for what some say could be the worst holiday season in a decade. Hopes are being quashed by eroding consumer confidence, layoffs and rising energy costs, especially in California.

Children’s Place Retail Stores Inc. is buying 25% less merchandise for its early Christmas promotion, which begins the day after Thanksgiving. Federated Department Stores Inc., owner of Bloomingdale’s, Macy’s and other outlets, is slashing expenses and crafting contingency plans in case same-store sales fall below its predictions of a 1% to 2% second-half decline, Chief Financial Officer Karen Hoguet told analysts in a conference call last Wednesday.

Eddie Bauer plans to enter the holidays with inventories that are 7% to 9% lower than at the same point last year — even though the chain completely overhauled its merchandise to create a more classic look that baby-boomer customers are expected to like better, says Jim Cannataro, chief financial officer of parent company Spiegel Inc.

PricewaterhouseCoopers expects non-auto retail sales, excluding gasoline, to grow just 2.5% during the fourth quarter, well below the tepid 4.5% last year. Such growth would make this Christmas “one of the weakest since the last recession,” says Frank Badillo, a senior retail economist at the accounting and consulting firm. The economic slowdown hurt businesses first, and the impact on consumer spending has taken more time to show up. “I think the full effect of these layoff announcements will take effect in the second half,” he says.

Yet the retailers’ fear of getting stuck with too much merchandise could itself damage holiday sales. Thin stocks could result in early sellouts of popular merchandise, leaving customers little to buy during the holiday crunch. Manufacturers say retailers also are cutting back their budgets for reordering during the season, leaving even less room to maneuver. “A lot of what happens in the economy is built on expectations, which become a Catch-22,” Mr. Badillo says. “If you’re planning for a recession, you’re going to create the very conditions you’re trying to avoid.”

But most retailers — ordinarily too optimistic — would rather err on the conservative side this time. “A year ago we were a little more aggressive, coming off an extremely successful 1999, when we were placing orders for 2000,” says Spiegel’s Mr. Cannataro. “I don’t think anybody was expecting the weakness we saw in November and December last year.” By cutting inventories in advance, retailers hope to avoid a repeat of last year, when the economy went south abruptly before the holidays, leaving them with mountains of unsold goods.

Online holiday sales should increase over last year, but much more slowly than in years past, says Heather Dougherty, an analyst at Jupiter Media Metrix, an Internet market research firm in New York. Holiday sales totaled $10.8 billion in 2000, $7 billion in 1999, and $2.6 billion in 1998, the company says. Ms. Dougherty predicts the rise in online sales will be “much more modest” than last year’s 54% increase, but hasn’t yet issued a detailed forecast. Like last year, Web sites of brick-and-mortar retailers, not pure-play Internet companies, will get the overwhelming majority of holiday sales, she says.

Overall, retailers say that they are planning for flat or slightly lower same-store sales during the holidays. But they admit they can’t get a handle on how deep the problems will run or how long they will last. The economy is following an unusual pattern, they say. “This is the only time I can recall that we’ve ever had the manufacturing and industrial sector slow down before the consumer slowed down, which decreases demand, which then causes the industrial side to slow again,” says Donald Trott, a retail analyst with investment firm Jefferies & Co.

So retailers are leaning on apparel makers, trying to hedge their bets by getting goods in stores as close to Christmas as possible. Manufacturers ship the bulk of holiday merchandise in August and September, and they say their retail customers are canceling, deferring and cutting back orders at unprecedented rates. “It’s certainly been at a higher level than I’ve experienced anytime I can remember,” says Hal J. Upbin, chief executive officer of apparel-maker Kellwood Co. and a 13-year industry veteran.

At Liz Claiborne Inc., CEO Paul Charron says some retailers are asking manufacturers to delay shipments. For example, some are requesting that clothing that normally would ship on the 25th of one month be held until the seventh of the following month. Like many other clothing makers, Liz Claiborne is trying to compensate for the delays by taking advantage of speeded-up production cycles.

Apparel giant VF Corp., maker of Lee and Wrangler jeans, Vanity Fair intimate apparel and other brands, says it has been keeping inventories “very lean” by using technology to micromanage what merchandise goes to each store. “When sales aren’t up to expectation, we don’t have a surplus of items,” says Mackey MacDonald, VF’s chief executive. VF also has shifted from basic merchandise to faster-turning “innovative and fashion” merchandise, which has grown to half its production from 30%, he says.

Retailers know that they can hold back only so long before running aground of other problems. Sharper Image Corp. is working with Asian factories to delay shipments of its high-tech gadgets by two to three weeks. Wait any longer, and costs start to multiply. “Once you push it too far, you can’t get it on the boat,” says Tracy Wan, Sharper Image’s president and chief operating officer. “If you can’t get it on the boat, you have to put it on air freight, and air freight is very expensive.”

What if retailers’ best efforts fail to protect profits? “Pray,” jokes George Remeta, vice chairman of United Retail Group Inc., which runs the Avenue chain of women’s plus-sized apparel stores. “We’ll close the office and have everybody go to their respective churches.”

-- Andre Weltman (aweltman@state.pa.us), August 21, 2001