What’s in Store for Retailers?

The economic omens couldn’t look better for retailers.

Unemployment hovers at historic lows. Interest rates are modest. Household income is up. Welfare roles have shrunk. By most measures, all signs point to yet another roaring holiday season.

Why, then, is an atmosphere of nervousness hidden behind the perennially optimistic veneers of retailing executives? It seems a new E word--emotion--has replaced “expansion” and “e-tailing.”

“While the underlying economics look very good, the holiday season is as much about emotion as it is about economics,” said Richard Giss, partner with the Retail Services Group of accounting firm Deloitte & Touche in Los Angeles.

The Commerce Department reported Tuesday that retail sales rose just 0.1% in October from September, hurt by a slump in auto sales and far off the pace of the 0.9% increase recorded in the previous month.

Although some analysts saw signs of a slowing economy in the report, comparisons with October 1999 still looked good. Total retail sales are 7.0% above the same period a year ago.

Nonetheless, analysts are asking whether the positive tide of consumer sentiment is ebbing.

Consumers are spooked by a sagging stock market--including the 23% year-to-date plunge in the Nasdaq composite index--gas prices that are sucking billions of dollars out of pocketbooks and a sense that job growth is slowing, said Carl Steidtmann, a retail analyst with PricewaterhouseCoopers in New York.

Add to that a presidential election in which virtually every indicator--from the popular vote to the electoral vote to the makeup of the Senate--is split evenly between Democrats and Republicans, leaving the prospect of political gridlock.

Toss in a healthy, but declining, level of consumer confidence, and the result is emotional consumers and nervous retailers.

Certainly there’s anecdotal evidence of a slowdown in recent weeks. Workers at the Nordstrom department store in Cerritos say the last weeks of October and the first part of November were slower than expected.

“We gear up all year long for this time of year, hoping we are making the right decisions and plans,” said Craig Levra, chief executive of the 23-store Southern California sporting goods retailer Sport Chalet. “But it is now when the customer really votes on how we did, and--unlike in other elections--we don’t get a recount.”

Giss believes holiday sales will slow to a growth rate of just 1% to 2% this year, the lowest since recession-cursed 1990 and down considerably from the 7.3% gain last year. And his estimate runs counter to his own firm’s annual Retail Holiday Outlook report for the National Retail Federation, which predicted sales will rise 5.5% to 6.5% this year.

“I believe that survey was overly optimistic from the get-go,” Giss said.

Steidtmann expects growth of around 4.5%, about half of his estimate of the gain in 1999.

Retailers saw the first signs of a consumer slowdown earlier this fall when back-to-school sales lagged expectations. “That’s a good indicator for what is going to happen at Christmas,” said Won Sung Sohn, chief economist for Wells Fargo & Co.

Many of the major retailers--including Gap Inc. and Wal-Mart Stores Inc.--have said earnings will fall below expectations in the important fourth quarter.

The giant electronics retailer Best Buy Co. said its profits will dip below previous expectations for the holiday period even though it sees strong store traffic and same-store sales--a key measure of retailing health--running 5% ahead of last year’s pace.

Discounting to maintain sales and market share is one reason. The other is what Allen Lenzmeier, chief financial officer of the Minneapolis-based chain, called a “cautious consumer environment.”

Yet in California, shoppers remain upbeat as the Christmas retail frenzy approaches.

“We’ll probably spend a little more than last year because my husband has been doing well,” said Cherie Pohling, a Garden Grove grandmother.

Tyra Bates, 20, also plans to spend more this Christmas.

“I just started a new job and, with the bonuses and stuff, I have more money to spend,” said Bates, who lives in Cerritos. “I think the economy is better than last year. There seem to be more jobs, and employers seem to be offering more money.”

And although she’s seen the bear market develop on Wall Street in recent months, it means little to Bates, who doesn’t own any stocks or mutual fund shares.

Robert Mar, a schoolteacher who lives in Westminster, is an investor, but he said short-term fluctuations in the stock market won’t crimp Christmas for him this year.

“I am one of those people who is in this for the long term and who accepts the fact that sometimes there are downturns in the market,” Mar said.

Elena Alcantar, a single mother who works in an escrow office, said she is also better off financially this year because of a healthy raise. Nonetheless, the Downey resident plans to spend less this holiday season because she is saving to purchase a home.

“That makes me very budget-oriented, and anything that I am buying is just for the kids and will be with cash,” Alcantar said.

She said increases in gas prices and clothing in recent months have cut into her budget; but with those exceptions, the economy looks pretty strong.

That’s why John Rangel, chief financial officer of the Los Angeles-based K2 Inc.--which manufactures sporting and recreational equipment--described his company as “cautiously optimistic.”

Judging from the jammed parking lots of Southland malls on recent weekends, it should be a good year, Rangel said. Moreover, the weather is cooperating for K2’s ski and snowboard equipment and apparel. “It’s snowing in the right places at the right time,” he said. “We want to see snow before Thanksgiving.”

Yet, Rangel has seen evidence of caution on the part of retailers. He said mass marketers have acted conservatively in ordering products.

That reflects a national trend, according to Giss of Deloitte & Touche. Retailers will have enough to sell through the big January sales, but they’re not overstocked.

“You aren’t going to see the fire sales like you did a the beginning of the 1990s,” Giss said.

Analysts are divided on how a flat retail season might affect the economy next year.

Steidtmann believes the season is both a psychological and financial indicator for what’s ahead. A healthy increase, he said, can set the stage for economic growth into 2001. A poor Christmas, however, will depress corporate profits, pulling down the stock market and depressing consumer confidence.

“Consumer spending has been one of two big drivers of this expansion,” he said. “And the other has been business investment, which to a large degree has been a reaction to consumer spending.”

Steidtmann believes a Christmas that’s par, or just slightly above last year, would lead to a national economic slowdown to a 1% to 2% growth rate. That in turn will cut into job growth, business investment and the fat tax surpluses the federal government and many states have enjoyed in recent years.

Others say the expansion can withstand slower holiday spending.

“Last year was so good that even a 1% to 2% gain this year is not a bad number in real terms,” Giss said.

And though it is a bellwether for the economy, consumer spending is just one factor of many in the decade-old expansion.

A 1% dip in holiday spending in California, for example, represents less than a $500-million swing in the state’s more than trillion-dollar economy, said Michael Dardia, an economist with the nonprofit Public Policy Institute of California.

If job and income growth hold steady, the E-word--expansion--looks to regain its place in the minds of consumers and retailers.

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Holiday Cheer?

Most analysts expect retail sales to rise for the 10th consecutive year this holiday season. The big question is whether the increase will match the healthy jumps in recent years. Increases in holiday sales since 1989:

Sources: National Retail Federation, based on Department of Commerce statistics; Census Bureau