The pressure is building for holiday.

Consumer behavior is the X factor, and if the recent past is any indication, shoppers will demand value and put off purchases on the expectation that stores will blink and cut prices.

This story first appeared in the September 22, 2009 issue of WWD.  Subscribe Today.

Moody’s Investors Service said in a recent research note that department stores — even with inventories more in line with sales than during the depths of the recession a year ago and despite better than expected first-half earnings — are likely to beat the discount drum for holiday.

“We believe there is a high risk that the American consumer will have a ‘discount staring contest’ with the department stores by delaying purchases until they see a level of discounts that they believe offers them value,” the ratings agency said. “We believe that the department stores will likely blink first by opting to quickly mark down rather than risk having the inventory left over after the holiday season.”

Disappointing back-to-school sales were not a positive harbinger for holiday or the third quarter.

Although August same-store sales results were slightly better than in July, they weren’t sufficient to lift most third-quarter expectations. Consumers’ tentative shopping patterns and a late Labor Day shifted much of the burden for third-quarter sales into September.

Even with easier comparisons, signs of slowly improving consumer confidence and greater stability in the credit markets, the prospects for retail sales in the back end of the year are uncertain.

According to a Wedbush Morgan Web-based survey of 1,013 adults and 513 teens, 70 to 76 percent of b-t-s shopping had been completed by the end of August. The survey also indicated that b-t-s budgets contracted 22.6 percent to $342 in August from $442 in July.

This was significant because many expected “a back-end-loaded back-to-school season,” as Labor Day shifted to the second week of September and schools opened later, said Wedbush Morgan retail analyst Betty Chen.

“Not only is spending down, but about 70 percent of spending had already been done in August,” she said. “Knowing this, we are more worried.”

If September same-store sales do not improve over August’s results, investors could “reassess a potential fourth-quarter turnaround,” Chen said. This will only add to the pressure, both on Wall Street and at the mall, to pull the promotional trigger.

At an RBC Capital Markets consumer conference in New York this month, David Levin, Casual Male Group Retail Group Inc. president and chief executive officer, said holiday will be “challenging” but it “won’t be as promotional” as last year, partly because inventories will be so lean.

Another panelist, Robert Humphreys, Delta Apparel Inc. chairman, president and ceo, said lower inventory levels could give retailers a “unique opportunity to retrain the consumers” to shop at full-price points. But that idea was quickly rebuffed by Urban Outfitters Inc. chief financial officer John Kyees. “It only takes a handful of people to match price,” he said.

“Even though most companies hope to have fewer discounts year-over-year, we will still see markdowns — just not as severe,” Wedbush Morgan’s Chen said.

Noting the heavy markdown activity needed to coax consumers into buying in August, Pali Capital retail analyst Amy Noblin agreed. “I don’t want to seem negative or doom and gloom,” she said. “I am not in an alarmist phase, but I think we will see this [behavior] in holiday. The consumer will not come out as rapidly as people think.”

Most experts are in agreement on one thing: a major catalyst driving demand will be the consumers’ continued focus on value.

“For holiday, retailers are better prepared, but the consumer is still looking for deals,” said Esteban Bowles, a principal in the retail practice of A.T. Kearney. “Retailers that will continue to do well will have more attractive prices.”

Kurt Salmon Associates vice chairman Peter Brown noted although the fall will likely carry an air of recovery, retailers will be in for a “very tough holiday.”

“In the fall, we will start to see what appears to be an improvement,” he said, as we will be “lapping the Bush stimulus” and the anniversary of last September’s financial collapse. “But the consumer has got to continue to deleverage.”

The retail world will be hard pressed to adjust to fundamental changes in consumer psychology, said Erin Armendinger, managing director of the Jay Baker Retailing Initiative at the Wharton School of the University of Pennsylvania.

Consumers have been “trained” to shop later, she said. “We’ve always operated on a fashion schedule. Maybe we should operate on a consumer schedule. Maybe people don’t buy winter jackets in August. They buy them when it gets cold.”

In order to appeal to this consumer, “smart companies are doing more than just cutting inventory,” she said.

Neely Tamminga, a retail analyst at Piper Jaffray, explained: “Retailers are buying closer to need every year. The industry has been learning, and it’s still learning.”

To retain customers and find new ones, retailers will need to redefine the interaction between fashion and value, she said.

“The consumer has gone away from flashy brands that have no meaning in terms of service, style and quality,” Tamminga said, pointing to upscale department store Nordstrom, which has reintroduced more value-oriented brands like Fossil.

One advantage of the recession, Tamminga said, is it has forced retailers to concentrate on their relationships with vendors and pushed them to “deliver closer to trend.” This has been particularly true in her area of concentration, misses retailing, which showed weakness even before the onset of the recession, much of it tied to lackluster fashion.

Although women’s retailers were more promotional in August than they had been in the same month last year, Tamminga said she was encouraged by new fall product, and believes retailers are generally on the verge of an emerging wovens trend that will influence silhouettes going forward. Skinny silhouettes in denim, tailored to all body types, will also have “implications going into spring of 2010,” she added. “The consumer may not be spending like it’s 1999, but there is reason for optimism.”

There have been a few encouraging signs about September. However, Michael Niemira, chief economist for the International Council of Shopping Centers, said: “Although easier comparisons in September will help to improve the trend for the month, ICSC Research still expects sales will be down about 2 percent from its year-ago level.”


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