Retailers See Strong Sales for Holidays (NYTimes, 9/19/06)

September 19, 2006
Retailers See Strong Sales for Holidays
By MICHAEL BARBARO
The holidays may not be so bad after all.
After months of hand-wringing over higher gas prices and a sluggish housing market, which threatened to reduce spending in the crucial November-to-December period, the nation’s retailers are beginning to talk about an above-average shopping season.
No one is predicting a blockbuster Christmas — those seem to have ended in the 1990’s — but as gas prices slip back into the $2-a-gallon range and the hurricane season passes without calamity, there is a growing optimism that consumers will return to the mall, even without the lure of deep discounts.
When the National Retail Federation, the industry’s largest trade group, releases its annual forecast for the holiday season today, it will predict a sales increase of 5 percent, to $457.4 billion, compared with last year.
It is a respectable, even strong figure, well above the industry’s performance from 2000 to 2002, when retailers did not book gains of more than 3.4 percent, but it falls short of the last two seasons, when they achieved increases of more than 6 percent.
“The worst of it is over,” said Tracy Mullin, the trade group’s president. But even Ms. Mullin quickly cautions that consumer spending will “not be robust.”
It is a conflicted sentiment shared by industry leaders, who in interviews over the last week described consumers as at once worried about housing prices and relieved by gas prices, as pulling back on expensive purchases but ready to indulge on smaller products.
Clearly, executives are not done worrying.
Myron E. Ullman, the chief executive of J. C. Penney, said the “economic climate is not robust and our customer is more cautious,” though he noted the company was in a strong position.
Robert L. Nardelli , the chief executive of Home Depot, said there would be “a lot of uncertainty” in the housing market for the second half of the year and he saw no quick relief. “I can see it going a little longer than others” do, he noted, referring to the housing slowdown.
But even the most cautious executives said that lower gas prices, should they remain stable, would create an opening for retailers. According to Wachovia Securities, gas prices at the pump have declined roughly 13 percent over the last six weeks, to $2.60, after reaching about $3 at the beginning of August.
“For the first time in a while, most management teams say the consumer is alive and well and spending,” said Gabrielle Kivitz, a retailing analyst at Deutsche Bank Securities, after a round of meetings with executives at clothing companies.
For much of the last year, gas prices have become a favored explanation for lackluster sales, popping up in quarterly earnings reports from chains as varied as Wal-Mart, Ann Taylor and Federated Department Stores, which owns Macy’s and Bloomingdale’s.
And even though they have begun to fall, gas prices will still have a noticeable influence on retailers over the next three months in the form of lean inventories. Because stores planned for higher gas prices, they cut back on the size of their orders to avoid a glut. The result is likely to be less reliance on last-minute discounts to sell extra merchandise, which became pervasive last year.
“Retailers have planned very conservatively,” said John D. Morris, an analyst at Wachovia Securities who has long tracked markdowns in clothing chains. “Six weeks ago, when chains ordered for the season, things were cloudy. Now there is improvement.”
But lean inventories, while protecting profits, will not deliver strong sales. Must-have products will — and, so far, none have emerged.
The iPod and its caravan of accessories are still expected to be top sellers this season, and analysts believe the latest iteration of the Elmo doll, a closely guarded secret set to be unveiled before Christmas, will invigorate the toy business.
But there is no clear hot fashion in the clothing world. Several analysts predict that high-priced denim, the fail-safe clothing selection over the last five years at stores ranging from American Eagle Outfitters to Barneys, may have finally run its course, leaving stores to scramble for a replacement.
“Denim is performing poorly and everyone is expecting it to be down,” said Ms. Kivitz, who noted that Abercrombie & Fitch, one of the most popular names in teenage clothing and a major player in the denim business, had put an emphasis on tops, rather than bottoms, for back-to-school.
Perhaps formality is making a comeback. “Dresses,” Ms. Kivitz said, “will be a very important category.”