By Ylan Q. Mui
Washington Post Staff Writer
Friday, December 5, 2008
Retailers posted the worst November sales in more than 30 years yesterday, as holiday shopping not only failed to lift the economy but showed that the financial crisis is further distressing everyday consumers.
About 30 major companies -- including Macy's, Abercrombie & Fitch and Target -- posted sales declines at established stores. Overall, retail sales in November fell 2.7 percent compared with the same month last year, marking the second consecutive negative month, according to the International Council of Shopping Centers, a trade group.
And American consumers, whose spending accounts for the bulk of the economy and who have powered the nation out of previous recessions, are turning away from their most potent tool: credit cards. The recent tightening of consumer credit has shoppers leaving their plastic at home -- and sending retailers into a tailspin.
According to an analysis by Citi Investment Research, the constriction in lending that began earlier this year points to at least a 5 percent decline in consumer spending on goods during the heart of the holiday season. A Consumer Reports survey showed more than half of shoppers intend to rely less on credit this Christmas. One retailer, Circuit City, has already blamed the meltdown in credit for sending it into bankruptcy protection last month.
"If you're a retailer right now, you see the contraction in consumer debt as a problem," said Jerry Welch, former chief executive of FAO Schwarz and now head of prepaid card service nFinanse. "There's no way you can be a retailer and look out and see people being maxed out on their credit cards and think it's good for you."
Credit card charges enjoyed annual double-digit growth from 2004 to 2006, according to the Nilson Report, which tracks consumer payment systems. But last year, annual growth slowed to 8 percent. This year, credit purchases are expected to rise only 3.3 percent as the recession lashes shoppers.
Consumers say they are putting away the plastic for several reasons. Some are buried under debt -- delinquencies have reached record highs. Or they have been hit by recent increases in interest rates and reduced limits, eroding their spending power. Many who have access to credit are afraid to use it, spooked by the rising unemployment rate and falling home values. Those scenarios have broad implications for retailers who have relied on consumers' easy access to credit to finance sales, particularly of high-priced discretionary items such as flat-panel TVs or stainless steel appliances.
Circuit City blamed tightened credit for decimating sales when it filed for bankruptcy protection in November. The nation's second-largest electronics retailer, which is based in Richmond, said 75 percent of its transactions are typically made on credit cards. As people scaled back on credit card purchases, sales plummeted.
That set off a vicious cycle that begins and ends with consumers: Declining sales made vendors wonder whether the company would have enough cash to make inventory payments. They in turn tightened lending to Circuit City, limiting its ability to buy merchandise to stock its shelves. Poor inventory turned off even more shoppers, further hurting sales. The New York Stock Exchange notified the Securities and Exchange Commission yesterday it planned to stop listing Circuit City's shares as of Dec. 15. The company's stock has fallen to 19 cents.
Circuit City is not the only retailer in pain. Lowe's, the home improvement chain, said that cash, check and debit transactions grew during its third quarter. Meanwhile, use of its branded credit card dropped 1 percent, with a similar reduction in all credit card use. The shift is affecting how its customers shop and what they buy.
The average purchase is down 2 percent, the company said. Shoppers are still spending on inexpensive do-it-yourself projects -- paint sales, for example, have remained strong -- but big-ticket purchases that generally require financing, such as kitchen cabinets, have dropped off.
At Target, shoppers are trading down from steak to chicken or buying part of a bedding set rather than the whole package. Executives said credit card transactions in stores began to decrease for the first time in many years during the second quarter.
"I expect that trend to continue for a while," chief financial officer Douglas Scovanner said recently.
Retailers issuing their own credit cards have their own problems. Lowe's, which issues its branded card through GE Capital, said it has had to reduce limits and increase the cut-off credit score on new applications to guard against rising default rates. When it does so, it is also limiting its customers' ability to buy.
Earnings at Target's beleaguered credit card division fell by $167 million during the third quarter, dragging down the company's profit with it.
One way retailers have responded to the credit crunch is to discount and promote items earlier than in previous years, hoping it would encourage shoppers to spread their purchases over a longer time, retail experts said. At Sears, the department store chain reinstituted a layaway program after a 20-year hiatus. Best Buy's recent streamlining of its financing programs helped boost sales during the first half of the year as customers saw credit from other sources dry up, the company said.
The Federal Reserve has announced steps that it hopes will alleviate the pain. It will create a program to buy as much as $200 billion in securities backed by student, auto and credit card loans to help jump-start those markets. The program is not expected to begin until February, too late to help retailers facing a Grinch of a Christmas.
Perhaps the larger problem for retailers is that even those who have access to credit are not using it.
"The bottom line is that consumers are genuinely concerned about their personal financial health and they are cutting back voluntarily," said Kimberly Greenberger, an economist at Citi Investment Research.
A recent survey by Consumer Reports said about 21 percent of shoppers this holiday season plan to use cash, and more than half said they will rely less on credit. The trend is particularly evident in people ages 18 to 34, who have been among the heaviest users of credit.
Consumer advocates say the credit crunch could be a good thing if consumers learn to spend within their means and retailers adjust to that new reality. The average revolving credit card debt per household has spiked 138 percent over the past 20 years to $6,528 from $2,739, adjusted for inflation, according to consulting firm Innovest Strategic Value Advisors. The shift to cash is forcing many shoppers to take a hard look at their budgets.
"Cash and debit are self-regulatory and self-control methods," said Adam Levin, cofounder of Credit.com and former consumer affairs director for New Jersey. "It's tougher to hand over $100 than it is to just hand over your credit card."
Author and blogger Devra Renner, 41, of Centreville instituted a "credit card exorcism" in her household after her bank cut back the home-equity line of credit for her kitchen remodel this spring. The family is still paying off the appliances. The last personal charge on her MasterCard was $3.69 at Starbucks nearly two months ago.
She has talked to her 8- and 12-year-old children about the sacrifices the family will make as they celebrate Hanukkah. Renner is thinking about getting a few presents for the entire family, rather than something for everyone on each of the holiday's eight nights.
Renner said she figured now was as good a time as any to begin living without credit cards. Her husband, who is in the military, hopes to retire soon, which will be another hit to their budget.
"When will we welcome them back into our lives?" she said. "You know, I don't even know if we will."
Staff writer Joel Achenbach contributed to this report.