Stores brace for weak holiday sales

By The Wall Street Journal

As economists predict the worst holiday sales season since the recession of 1991, retailers are fighting back with an arsenal of new selling strategies, staff cutbacks and more emphasis than ever on low prices.

Retailers are planning bigger, bolder and earlier ad campaigns to lure shoppers as early as possible, racing to make the most of the shorter holiday season this year -- five fewer days between Thanksgiving and Christmas than in 2007.

Some chains, including Macy's (M, news, msgs) and Costco Wholesale (COST, news, msgs), already have put out holiday merchandise.

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Stores are expected to hire fewer part-time staffers during the holidays, to control labor costs. Gift cards will be fancier, and companies such as Target (TGT, news, msgs) say they'll emphasize affordability with a range of gifts costing less than $25.

"We're not naive about the sentiment that's out there," says Myron E. Ullman III, the chairman and chief executive of J.C. Penney (JCP, news, msgs). Last week, the department store chain launched an ad campaign emphasizing good values in the clothing it sells.

Costco says it expects to be selling more branded merchandise -- from Lily Pulitzer dresses to Tag Heuer watches -- as sales in full-price luxury stores soften and as distributors unload surplus products on the wholesale clubs.

Predictions for the holiday selling period began trickling out last week, and they weren't pretty. Several retail market research and consulting companies forecast sales gains to be the weakest in 17 years.

Market research firm TNS Retail Forward predicts sales to rise a meager 1.5% in the fourth quarter, lower than even the tepid sales gains in the third quarter.

Though TNS took into account higher unemployment, the housing slowdown and difficulty of obtaining credit, none of the forecasts had yet factored in the latest turmoil in global finance, which could drive consumer confidence even lower.

Last week's financial crisis could put more pressure on luxury-goods sales, as the financial sector employs a big base of affluent customers, analysts say.

Saks (SKS, news, msgs) gets about 20% of its total sales from its New York City flagship Saks Fifth Avenue store. Tiffany (TIF, news, msgs) gets about 10% from its New York City flagship, estimates Goldman Sachs Group (GS, news, msgs).

"The psychological impact goes beyond just people who are laid off," says Raphael Moreau, a retail analyst with Euromonitor International, based in London.

Retailers are prepared for bad news, having spent a year coping with sluggish sales by tightening inventories and deploying job-scheduling software. Fourth-quarter hiring expectations in wholesale and retail businesses are at a 17-year low, according to a survey of 14,000 employers released this month from staffing firm Manpower.

"Retailers have done a good job managing controllable expenses such as inventory and labor," says Carl Steidtmann, an economist at consultants Deloitte Consulting. "If things turn from bad to really bad, they are still well-positioned to handle it," he says.

A gift card that doubles as a digital camera

That preparation could help retailers avoid the big markdowns used in recent years to clear unsold merchandise. Though with a shorter holiday season, some retail chains may choose aggressive promotions to get people into their stores earlier, says TNS Retail Forward senior economist Frank Badillo.

Wendy Liebmann, the chief executive officer of New York research and consulting firm WSL Strategic Retail, says she expects retail advertising during the holiday season to increasingly emphasize value and emotional comfort.

The economic climate will force more high-end retailers, in particular, to run sales promotions earlier, she says.

Last year, some retailers had already stocked up on holiday merchandise before consumer spending began its steep slide, requiring discounting to clear the shelves of holiday goods. Sears Holdings (SHLD, news, msgs), the parent of Sears and Kmart, reported a $56 million loss on heavy markdowns in its fiscal first quarter, which ended May 30.

TNS Retail Forward believes discount superstores, warehouse clubs and dollar stores will be winners as shoppers continue to look for value or trade down.

Declining flat-panel TV prices will encourage people to buy digital TVs this holiday, giving a boost to that sector, Badillo predicts.

But slow housing sales and the financial crisis mean home-goods retailers will be among the hardest hit, along with apparel retailers and department stores, he says.

Gift card sales are also likely to suffer as consumers respond to higher gas prices, higher food prices and the sluggish economy, according to Archstone Consulting. Retail gift card sales are expected to dip 4% to $17.2 billion this holiday season.

Limited Brands (LTD, news, msgs) plans to let Victoria's Secret customers, in select stores, personalize gift cards with the recipient's name. Target, meanwhile, is offering a gift card that doubles as a digital camera.

This article was reported and written by Ann Zimmerman and Jennifer Saranow for The Wall Street Journal.