Retailers' Holiday Outlook Is Grim

By Ylan Q. Mui
Washington Post Staff Writer
Thursday, September 20, 2007

Retailers are in for a gloomy holiday season, with shoppers weighed down by the weakening housing market and the credit crunch, according to industry forecasts.

The National Retail Federation, a trade group and frequent industry cheerleader, turned in its lowest holiday forecast in five years yesterday. It said discounters and some department stores could be among those most adversely affected as low- and middle-income shoppers curtail their spending.

"Retailers are in for a somewhat challenging holiday season as consumers are faced with numerous economic obstacles," said Rosalind Wells, the group's chief economist. "Consumers will be forced to be more prudent with their holiday spending."

The group forecast that sales in November and December will grow 4 percent, from $456.2 billion last year to $474.5 billion this year. If correct, it would put the season's annual growth well below the 10-year average of 4.8 percent. It would represent the slowest holiday growth since 2002, when sales rose a meager 1.3 percent.

The group had predicted growth of 5 percent last year and was disappointed when the results came in at 4.6 percent. This year, the steady drumbeat of bad economic news could not be ignored.

The holiday season accounts for roughly 20 percent of retailers' annual sales. Blockbuster promotions are always a part of the tableaux, and day-after-Thanksgiving sales on "Black Friday" have become a tradition to rival turkey. This year, stores are expected to become even more aggressive as they try to drum up excitement -- and foot traffic.

Already, news of bargains is leaking out, to retailers' dismay. posted its first Black Friday ad last week, more than two months before the promotions take effect. The ad is purportedly for Ace Hardware, not exactly one of the big seasonal players, but the DeWalt 7 1/4 -inch circular saw will be a bargain at $59.99 after a $30 mail-in rebate, almost half its current price.

Other groups also reported a dour outlook. TNS Retail Forward, a consulting and market research firm, predicted sales growth in the fourth quarter -- which for most retailers is November through January -- will slow to 3.3 percent from 4.6 last year.

"This top-line forecast may still underestimate the extent of the weakness," said Frank Badillo, senior economist at the firm. "The risks are biased in favor of still-weaker growth, particularly if the housing market deteriorates further."

In a survey last month of the chief financial officers of 100 of the nation's largest retailers, accounting firm BDO Seidman found that 45 percent cited the weak housing market as their chief concern for the second half of the year. High fuel costs, which dominated the first six months of the year, fell to second place in the survey.

Many mortgage interest rates have shot up after concerns over defaults on risky subprime home loans rattled financial markets in recent months. Home prices have deflated, leaving many consumers feeling pinched for cash. Though the Federal Reserve cut a key interest rate this week, consumers are unlikely to feel the effects in time for a holiday spending spree.

Home goods are especially vulnerable this holiday season and are expected to drag down growth in other sectors, according to Retail Forward. The firm also predicted tumbles in apparel and shoe sales. Even consumer electronics are expected to bring more-moderate sales growth after last season's frenzy over high-definition televisions.

Part of the challenge for retailers will be getting shoppers into the stores. According to ShopperTrak, a market research firm, foot traffic at stores across the country has declined seven out of eight months so far this year. It warned that the drop-off could be the precursor to an industry-wide decline in sales in the near future.

ShopperTrak co-founder Bill Martin was cautiously optimistic about shoppers continuing to head to the malls to buy gifts during the holiday season. But he warned retailers that the Grinch may not be far behind.

"If this slowing traffic trend does not reverse, we could see retail sales declining as early as the first quarter of 2008, which would be a significant negative event for the industry," he said.

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