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The fiscal cliff could come early for retailers.
This story first appeared in the November 15, 2012 issue of WWD. Subscribe Today.
President Obama and Capitol Hill might have until the end of the year to steer the country away from a slate of automatic tax increases and spending cuts, but Black Friday is just around the corner.
Stores are finalizing holiday plans and already promoting their doorbuster sales for the key post-Thanksgiving rush (and, in some cases, Black Thursday openings). Now they have to contend with a seemingly endless stream of negative headlines about the country’s shaky finances and sharp declines on Wall Street.
While the consumer reaction might still be a question mark, investors have already weighed in — and negatively.
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The S&P 500 Retailing Industry Group fell 1.2 percent, or 7.69 points, to 634.90 Wednesday as the Dow Jones Industrial Average dropped 1.5 percent, or 185.23 points, to 12,570.95. That leaves the market down nearly 675 points since the election. The decliners included some of fashion’s strongest names, such as Tumi Holdings Inc., down 7.2 percent to $19.99; Michael Kors Holdings Ltd., 5.7 percent to $48.11, and Lululemon Athletica Inc., 5.6 percent to $65.92.
As America’s fiscal deadline approaches, Europe also continues to struggle through the fallout of its own cutbacks. Tens of thousands of workers in the European Union held a series of strikes Wednesday to protest austerity measures and widespread unemployment. Spain and Portugal saw the highest turnouts with schools, universities, public transport and air travel disrupted.
President Obama staked out his fiscal cliff position at his first press conference since the election and called for an agreement to not raise taxes on 98 percent of Americans and 97 percent of small businesses.
“If we get that in place, we are actually removing half of the fiscal cliff,” he said. “Half of the danger to our economy is removed by that single step.”
Alternatively, Republicans have been focusing on eliminating tax loopholes and capping deductions.
Obama later pressed his case in a closed-door meeting with business leaders, including Mike Duke, president and chief executive officer of Wal-Mart Stores Inc., and Robert McDonald, president and ceo of Procter & Gamble Co. After the meeting, Duke said Wal-Mart’s customers are the center of the fiscal cliff debate.
“They are middle-class Americans and those aspiring to join the middle class,” Duke said. “Our customers are working hard to adapt to the ‘new normal,’ but their confidence is still very fragile. They are shopping for Christmas now and they don’t need uncertainty over a tax increase.”
The fiscal cliff could also cause shoppers at the other end of the price spectrum to put away their wallets.
“It’s something we expect is going to have a little bit more of an impact on the higher end of the market rather than the lower end,” said Frank Badillo, senior economist at Kantar Retail.
In addition to having more of their wealth tied up in the stock market, Badillo said higher-end consumers have been hurt by weakness in the job market for skilled professionals. “This is the other shoe falling now with the stock market falling off,” the economist said.
The fiscal cliff could hardly come at a worse time for retailers, which are still picking themselves up after Hurricane Sandy.
“As the holiday season is under way, considerable momentum has been lost and the impact of the aftermath of Hurricane Sandy on the holiday shopping season could be sizable, in addition to the negative impact on consumer confidence due to the political and media attention to the ‘fiscal cliff,’” said Chris G. Christopher Jr., senior principal economist at IHS Global Insight.
Christopher said IHS has adjusted its holiday forecast downward, and is now predicting that retail sales will increase less than 4 percent compared with last year.
“It is obvious that Hurricane Sandy has thrown retail sales off balance,” he said.
The retail sector began to feel the impact of Sandy in October sales. Seasonally adjusted apparel and specialty store sales fell 0.1 percent to $18.8 billion in October versus September, as department store sales fell 0.3 percent to $14 billion, according to the Commerce Department. Overall retail sales fell 0.3 percent in October, worse than the 0.1 percent dip economists projected.
Kevin Regan, senior managing director at FTI Consulting, said the upcoming holiday season would be “OK.”
“Obviously, there is a community that was harder hit than most and they may spend more on home and car repairs,” Regan said. “But there is a much larger community and I think they still view the holidays as positive as evidenced by the consumer confidence [index].”