Slow Sales Dim Hopes for Retailers
A bright sales season is all but a fanciful Christmas wish for the nation’s retailers as Americans pulled back on their holiday shopping last week despite the lure of deep discounts.
After a promising start in late November, retail sales during the final week before Christmas fell an estimated 6% from the previous year. Holiday sales in 2002 are now expected to post the smallest growth on record, according to a new industry report Monday.
Although official government figures won’t be available until next month, the disappointing sales were confirmed Monday by some of the nation’s biggest retailers, including Wal-Mart Stores, Target and Federated Department Stores. FAO Inc., the parent of toy retailers FAO Schwarz and Zany Brainy, said it would be shuttering as many as 70 stores, in part because of poor holiday sales.
“It’s a very bad trend to see in these numbers,” said Mike Niemira, a senior economist with Bank of Tokyo-Mitsubishi, who lowered his growth forecast for holiday sales to a measly 1.5% -- the lowest since at least 1970, when record-keeping began. The figures are for sales at stores open at least a year.
Even if shoppers flocked to the malls for the post-Christmas bargain hunt, Niemira said, it probably would not be enough to help pull this season out for retailers. “I think it’s a little bit late,” he said.
The sluggish holiday shopping portends trouble for the broader economy, which has been held up by hearty consumer spending even in the face of a jobless recovery and declining growth in personal incomes. Weak holiday sales mean fewer tax dollars for budget-strapped states such as California, and they could get the nation’s economy off on bad footing next year.
“Basically we have just one horse,” said Sung Won Sohn, the Minneapolis-based chief economist for Wells Fargo & Co. “If that one horse gets sick, not only the U.S. economy but the global economy will be in deep trouble.”
Although Saturday was, as usual, the busiest shopping day of the year thus far, sales dropped off sharply Sunday, a volatile pattern that has typified the current shopping season. California shoppers outspent the national average despite wetter-than-usual weather, and residents of the Northeast were the week’s biggest spenders.
There is a chance that retailers could get a boost in the days after Christmas, when shoppers are expected to return to stores with presents of cash and gift certificates and be greeted with even more dramatic sales and bargains. But the latest numbers indicate that it will be “exceedingly hard” for the season to make a comeback, Niemira said.
Retail sales are of particular concern to economists this year because the nation is in the early stages of recovery from a recession that began in 2000.
But some said it’s too early to count out U.S. consumers, who have carried the economy on their shoulders since the burst of the tech bubble and the collapse of business investment. Government data released Monday showed that consumer spending in November rose a solid 0.5% from the previous month.
The big question, though, is whether American shoppers can continue to carry the load until companies start investing again.
Economists have been counting on business spending to help refuel the recovery, but retailers won’t be buying if profits are too lean -- or nonexistent -- said Scott Hoyt, director of consumer economics at Economy.com, an economic consulting house in West Chester, Pa.
“If companies are making money, they can afford to hire people, to invest in capital equipment, to do the kinds of spending we expect to push the economy forward as we move through next year,” he said. “Without profits, they’re not going to do that.”
Retailers’ immediate goal is to rid their stores of holiday goods. If they can’t do that, they won’t reorder as much in January, and the effect will ripple across other sectors of the economy.
“Manufacturers don’t have to manufacture, transportation companies don’t have to transport the goods. So when it’s sold does matter,” Hoyt said. “The bigger picture is beyond the retail industry.”
The upshot for consumers is that, despite already steep price cuts, more markdowns are on the way, said Marshal Cohen, co-president of NPD FashionWorld, a market research firm in Port Washington, N.Y.
“The post-holiday sales are going to have to be even more dramatic than the pre-holiday sales, and that’s going to mean volume, but at very low margins,” Cohen said.
If profits are disappointing, industry insiders say, some companies that operate a large number of stores may spend the first part of 2003 deciding which ones to close. These companies include San Francisco-based Gap Inc. -- the nation’s largest specialty retailer and parent of the Gap, Old Navy and Banana Republic chains.
Gap, which operates 4,100 stores, typically closes 70 to 80 locations during the normal course of business each year, spokeswoman Stacy MacLean said. The company said last month that it expected to close more stores than usual next year. MacLean declined to comment on December sales and said there was no reason to think at this point that Gap would close more stores because of holiday sales results.
Weekly sales estimates by ShopperTrak RCT, a Chicago area firm that tracks retail activity, showed that Saturday’s sales were $7.2 billion, a respectable 4.5% increase compared with the year before. But on Sunday, sales were 1.9% lower than last year.
People involved with the survey speculated that would-be shoppers may have opted instead to see “The Lord of the Rings: The Two Towers,” which enjoyed the biggest December opening of any movie ever, or headed out of town for family gatherings.
A survey of 1,000 consumers showed that 45.4% of Americans shopped over the last weekend, 10 percentage points below what retailers were hoping for, according to America’s Research Group in Charleston, S.C.
Although the Saturday before Christmas typically is the biggest shopping day of the year, some retail watchers think the Saturday after Christmas will be even bigger this year.
The week after Christmas typically generates 10% of holiday sales, said Scott Krugman, spokesman for the National Retail Federation.
“You can almost call it a fifth quarter,” he said. “It provides retailers with another opportunity to make sales, giving them more customers, more traffic.”
But with Christmas falling on Wednesday this year, many people will be back on the job -- not in stores -- on Thursday and Friday, Krugman said.
In analyzing what consumers might do next, there’s reason for both concern and optimism, according to a recent report by Economy.com.
Wage gains, though weak, have been improving, and disposable income growth is healthy. In addition, shoppers have more money to spend after refinancing their homes, and both interest rates and inflation remain low.
But consumers’ wealth levels have decreased and debt levels have swelled. And, after years of hearty spending, there’s a shortage of pent-up demand, the report says.
The most likely scenario, the report concludes, is “moderate spending and retail sales growth sufficient, though barely, to keep the economy moving forward until business activity picks up.”
In California, the unemployment rate, which stood at 6.4% in November, is relatively low compared with previous recessions. Still, the loss of high-paying technology jobs and the evaporation of stock market gains has socked the state much harder than the rest of the nation in terms of income.
From the first quarter of 2001 through the third quarter of this year, personal income in the U.S. grew by 3.9%, compared with a 0.5% slide in California, according to figures from the UCLA Anderson Forecast.
That drop can be seen at the cash registers, where taxable sales are predicted to fall by 3.3% this year to $426.9 billion. Sales taxes are the state’s second-biggest source of revenue after personal income tax. Thus, the decline is one of the main reasons California is facing a $30-billion-plus budget deficit.
As recently as 2000, annual taxable sales in California soared by 11.9% to $441.9 billion, led by the highflying San Francisco Bay Area. But the region has fallen hard in the bust.
The most recent data available from the State Board of Equalization show that Santa Clara County, the heart of Silicon Valley, saw its taxable sales plunge 14% in 2001. The county has lost more than 110,000 jobs from its pre-recession peak, positions that aren’t expected to come back any time soon.
“My sense is that it’s going to be a really grim Christmas in the Bay Area,” said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp. “And that’s going to be a drag on the whole state.”
