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Make-or-Break Holiday Season Looms Large

By Ylan Q. Mui and Kendra Marr
Washington Post Staff Writers
Thursday, October 9, 2008

Each day of financial tumult is bringing more pressure to bear on the nation's retailers -- and time is growing short.

Yesterday, as the clock ticked ominously down to the critical holiday season, department stores and clothing retailers reported a sharp drop in sales while Target said its shoppers are delinquent in their store credit card payments. Port traffic, meanwhile, has been plummeting as retailers cut back on inventory.

"I don't think anyone predicted a crisis of this magnitude that couldn't be fixed quickly," said Bob Carbonell, chief credit officer for Bernard Sands, a retail rating and credit services agency. "If the American housewife puts the money under the mattress, we're in deep trouble."

In a year that seems to be defying all economic expectations, retailers are struggling to plot a course through the make-or-break holiday season, which accounts for nearly 20 percent of their sales each year. Will they have access to credit? How much merchandise should they order? Will anyone buy it? The moves they make now could determine where they stand in January.

The past three months were expected to bring the deepest cuts in consumer spending since the 1991 recession. September's dire economic news -- from the collapse of Lehman Brothers to the freefall in the financial markets to the government's $700 billion rescue plan -- have spooked shoppers and eroded confidence. On the day that the House of Representatives rejected the rescue plan, mall traffic plunged 12 percent, according to research firm ShopperTrak.

Scott and Elaine Bourdeau feel the ripples. The couple, who live in Herndon, had planned to travel to Italy for their 10th anniversary but opted instead to save money with a short trip to the San Francisco Bay area. They're postponing remodeling their bathroom and focusing on necessities -- clothes for their two daughters.

As they shopped in Georgetown yesterday, Elaine Bourdeau said her husband had decided they need to cut back on Christmas. "I agreed," she said. "One gift per kid."

Early retail sales reports yesterday reflected similar decisions by shoppers across the country. The best performers were discount retailers, but even they ranked below Wall Street estimates. Wal-Mart reported same-store sales at its domestic stores and warehouse club division, Sam's Club, grew 2.8 percent in September compared with the same month last year. Costco grew 9 percent.

Department stores from Kohl's to Nordstrom saw a drop in sales at stores open at least a year, a key measure of a retailer's health known as same-store sales. Dillard's, JCPenney and Saks plummeted by double digits.

Those grim reports are dimming retailers' hopes for a recovery before sleigh bells jingle. Target reported a 3 percent drop in sales, partly because of the large number of defaults on its store credit card, and warned that its profit this quarter might be lower than expectations. Several other retailers lowered their performance outlooks. About two dozen more retailers are expected to release their figures today.

"Right now, the fear is high and the uncertainty is higher," said Gene Tyndall, executive vice president at Tompkins Associates, a supply chain consulting firm.

Domonique Blaine, 23, of the District said he has been spending more conservatively, checking out sales racks and forgoing designer labels. But he has been eyeing a $250 Banana Republic plaid trench coat. He put the jacket on hold.

"A year ago, I would have just bought it," he said. His motto? "You got to manage, and you got to sacrifice."

Retailers are struggling to figure out how much merchandise they will need on shelves this holiday season. If they order too many reindeer sweaters, they will be stuck with unwanted -- and unprofitable -- merchandise the day after Christmas. If they do not stock enough to meet customer demand, they risk losing sales and frustrating shoppers.

Right now, retailers seem willing to risk the latter.

At Payless ShoeSource, chief executive Matt Rubel said yesterday the company is keeping inventory below last year's levels as traffic declines at the chain's 4,500 stores.

"We're being cautious on inventory and trying to be sure we don't overbuy," he said, "because we don't want to have to give the product away."

Yesterday, JCPenney chief executive Myron Ullman III said in a statement that the company is "tightly controlling" inventory as it heads in the final months of the year. Costco said the stock in each warehouse was down an average of $150,000 this quarter. Macy's has reduced its stock by 3.7 percent compared with the previous year.

"They don't want to get caught long on inventory," said Doug Hart, partner in the retail and consumer products practice at BDO Seidman. "Everybody's already starting to talk about discounts early."

Much of retailers' holiday stock is arriving at ports now, according to the National Retail Federation, a trade group, and consulting firm Global Insight. But traffic this month is expected to be down 4.3 percent from the same period last year. The entire year is forecast to be off 6.5 percent, the first decline since the group began tracking such figures in 2002.

Meanwhile, the choking credit markets may be making it more difficult for retailers to buy merchandise, said Erik Autor, international trade counsel for the NRF. In a recent survey of chief financial officers of large retailers by BDO Seidman, about 41 percent said their access to credit had tightened. Wal-Mart began paying for inventory with cash during the second quarter rather than relying on the increasingly volatile commercial paper market.

Credit services firm Bernard Sands, which helps manufacturers assess retailers, withdrew its Circuit City recommendation this week over concerns that the struggling retailer would not be able to pay for its inventory, a move that could hamper the company's ability to obtain credit in the future. Circuit City stock closed down 18 percent yesterday at 41 cents.

But even if the credit markets free up, retailers are unlikely to rest easy until shoppers like Toni Farrington, 63, of Georgetown feel comfortable pulling out their wallets. She said she only dreams of buying a big-screen television and new furniture -- expensive purchases that she doesn't need. And she only pays in cash.

"Consumer confidence is so critical here. It's discretionary spending that's in jeopardy," Tyndall said. "That's the worry."

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