Retailers facing grim holiday season

Ho, ho, horrible. The retail sector doesn’t have a lot to look forward to these days.

The economy is projected to remain weak until at least the first signs of spring, which means retailers will have to endure a second holiday season under pressure.

The lending crisis has pushed many retailers that were already suffering from shrinking sales into bankruptcy — a trend projected to continue through 2009.

Additionally, unemployment is expected to bloom well into next year, further curtailing household discretionary funds that previously allowed many shoppers to fill their carts even when they needed only a few items.

‘TWO YEARS DOWN’

“It’s been two years down for the retailers,” said Marie Driscoll, equity research analyst for Standard & Poor’s of New York. “The fundamental outlook is not favorable looking out until at least the second quarter of next year.”

Retail stocks as a whole declined about 18% last year, while the overall market was up about 3.5%, she said. Year-to-date as of last Tuesday, retailers were down about 26%, compared with a loss of 31% for the S&P 500 stock index.

The double whammy of weak sales and the credit crisis has had a devastating impact on retailers, as shown by the dozens of well-known companies that have filed for bankruptcy protection so far this year. Among them are Walnut Creek, Calif.-based Sharper Image Corp., Mervyns LLC of Hayward, Calif., Linens ‘n Things Inc. of Clifton, N.J., and Mrs. Fields Famous Brands LLC of Salt Lake City.

“Retailers are going bust, and there are more to come,” said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail-consulting and investment banking firm in New York. Among the most vulnerable are retailers selling products for the home, including furniture sellers and home improvement companies.

Retailers most likely to consider bankruptcy, a merger or store closings next year include department stores and those that have been acquired through leveraged buyouts “because they are loaded with debt,” Mr. Davidowitz said.

He expects 10,000 to 12,000 store closings next year atop the 7,000 to 8,000 store closings he estimates for 2008.

The holidays, historically a crucial sales period for retailers, are going to be horrible, because in addition to higher energy and food prices, the credit crunch is cutting off the consumer’s access to money, Mr. Davidowitz said.

“Santa will come, and there will be lines at Wal-Mart that will make the evening news,” he said. But sales compared to last year will be dramatically lower, “and last year was terrible,” Mr. Davidowitz said.

The National Retail Federation is predicting a 2.2% increase in holiday sales for 2008, which is well below the average 4.4% a year sales growth over the past decade. The Washington-based group expects to see consolidation among retailers after the holiday season, said spokes-man Scott Krugman.

One advantage for retailers, however, is that they have been dealing with the effects of tightening consumer pocketbooks for more than a year, he said.

Therefore, they are entering the holiday season with lean inventory and having already scaled back on labor and other operating costs, Mr. Krugman said.

“While the financial crisis caught a lot of people off guard, retailers have been dealing with problems for more than a year, and most retailers have positioned themselves for a challenging holiday season,” he said.

In fact, retailers positioned to take advantage of the latest consumer trends — scaling back on optional purchases and entertainment — could stand to benefit from the nation’s economic turmoil. Examples include Dollar Tree Inc. of Chesapeake, Va., Costco Wholesale Corp. of Issaquah, Wash., and even Oak Brook, Ill.-based McDonald’s Corp., Mr. Davidowitz said.

“The consumer is in massive trade-down mode,” he said. “They don’t have the money, and they can’t borrow it.”

NON-DISCRETIONARY FUNDS

The companies that have the best shot of thriving in — or at least surviving — this recessive economic period are those that can tap into consumers’ non-discretionary funds while they are buying products they need, Ms. Driscoll said. For instance, Wal-Mart Stores Inc. (WMT) of Bentonville, Ark., sells milk, underwear and other consumer staples in aisles that are adjacent to toys, home furnishings and consumer electronics.

Many general-merchandise stores such as Wal-Mart are beating the overall market. Wal-Mart stock is up 20% from a year ago, compared with a loss of about 35% for the S&P 500.

Looking toward the holiday season, which includes the months of November and December, companies that offer a strong value proposition, such as Family Dollar Store Inc. or J.C. Penney Co. Inc., will perform best, Ms. Driscoll predicted.

Retailers that offer niche products also could do well into next year, she said, mentioning Urban Outfitters Inc. The Philadelphia-based company sells unique but relatively inexpensive clothes and household items.