Holiday Retail Sales Set To Slide Amid High Unemployment and Low Consumer Confidence (XRT, XLY, FXD, RTH)

David Zeiler: Holiday retail sales – which account for almost 40% of retail revenue, worth $453 billion in sales last year – are in jeopardy.

Consumer spending continues to be restrained by an unemployment rate that has stayed above 9% for 26 of the past 28 months. Furthermore, rising food and gasoline costs, fears of a new recession, the loss of equity from the housing collapse, and mountains of leftover credit card debt have prospective purchasers tightening their purse strings.

And adding to consumers’ woes, income fell for the first time in almost two years in August, dropping a seasonally adjusted 0.1%, according to the U.S. Commerce Department.

Now the International Council of Shopping Centers (ICSC) said it expects holiday retail sales to be up 3% this year, down from the 4.1% increase last year, and markedly lower than the 5%-plus gains seen in prosperous economic times.

“This holiday season is going to be challenging,” Ken Hicks, chief executive of Foot Locker Inc. (NYSE:FL), told The Wall Street Journal.

Consumers are definitely not in much of a spending mood. The 45.4 September reading of the Consumer Confidence Index, although it was up slightly from August, is far below the 70.4 level it had reached in February. The index usually is over 90 in a thriving economy.

Even more damning, Americans are almost universally pessimistic about the U.S. economy. In a recent CNN/ORC International poll, 90% of Americans said economic conditions were “poor,” up from 81% in June.

Another survey, conducted last month by AlixParters LLP, found that 41% of consumers planned to spend less on holiday shopping this year. That’s up from 31% last year.

“Consumers are very apprehensive and cautious in spending, and we expect that to continue,” Diane Swonk, chief economist at Mesirow Financial, told USA Today.

Competing for Dollars

That means holiday retail sales will be captive to bargains and deals more than ever this year, particularly at discount and mid-level retailers.

“There will be lots of promotions-that’s become the norm,” Jack Kleinhenz, chief economist with the National Retail Federation, told The Wall Street Journal.

Wal-Mart Stores Inc. (NYSE:WMT) this month announced a layaway program as a way to help cash-strapped shoppers spend. Sears, Roebuck & Co. (Nasdaq:SHLD) and Toys “R” Us Inc. already have such programs.

The competition for in-store customers figures to be intense. Foot traffic is expected to decline 2.2% this year, according to ShopperTrak, the result of the years-long trend toward online shopping.

Some segments will struggle more than others. Traffic at clothing and accessories stores is expected to drop by just 1.1%, but traffic at electronics and appliances stores is projected to decline 4.9%.

“Every shopper in a store will be more valuable than last year, and retail stores should be ready to convert their holiday shoppers into sales,” Bill Martin, a ShopperTrak co-founder, told the Associated Press.

Rich Stores, Poor Stores

Holiday retail sales will not suffer universally, however. High-end retailers will fare better than low-end retailers, upholding a pattern evident in the retail sector (NYSE:XRT) for many months.

“The sales trends paint a continued picture of unevenness,” Michael P. Niemira, ICSC’s chief economist, told the Associated Press. “Luxury spending continues to be strong and consistent. Wholesale clubs are doing very well. The mid-tier retailers are seeing mixed performance. And the low-end retailers are a bit more challenged.”

The ICSC expects a 7.5% increase in holiday retail sales for luxury stores open for one year or more, while discounters will see just a 2.5% gain in such stores this year.

Several high-end retailers, such as Saks Inc. (NYSE:SKS), which operates Saks Fifth Avenue and Nordstrom Inc., said they’ve already seen their customers picking up more expensive items — and those customers are willing to pay full price for whatever they’re buying.

Paul Lejuez, an analyst with Nomura Securities, said other luxury retailers that should see strong holiday sales include Tiffany & Co. (NYSE:TIF) and Coach Inc. (NYSE:COH).

Meanwhile, Lejuez predicts some mid-tier specialty retailers, such as Abercrombie & Fitch Co. (NYSE:ANF), The Gap Inc. (NYSE:GPS), and American Eagle Outfitters Inc. (NYSE:AEO) will have a tougher road as they fight for the same struggling customers.

“This year, we’ve seen the strong stay strong and the weak stay weak,” Lejuez told Bloomberg News. “Nothing is going to change that this holiday season.”

Related ETFs: SPDR S&P Retail ETF (NYSE:XRT), Consumer Discret Select Sector SPDR (NYSE:XLY), First Trust Consumer Discretionary AlphaDex (NYSE:FXD), Retail HOLDRs (NYSE:RTH).

Written By David Zeiler From Money Morning

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