By  on December 29, 2006

Consumer confidence rose unexpectedly in December to an eight-month high, but that still might provide little for retailers to cheer about following a disappointing holiday selling season.

Analysts said the overall outlook for the U.S. economy remains mixed, and it is still unclear how consumers will react in coming months to their ever-increasing debt levels, the weakening housing market and a mixed picture for employment. Most retailers also have been mum so far about their holiday results, waiting to discuss them until same-store sales are released Thursday.

For now, however, consumers seem to be in a buoyant mood. The Conference Board's Consumer Confidence Index rose to 109, up from an upward revised 105.3 in November. The gain resulted from improved results for the Present Situation Index, now at 129.9 from 125.4 last month, and the Expectations Index, now at 95.1 from 91.9. The survey results are tabulated from a sampling of 5,000 U.S. households, with Dec. 19 as the cutoff date for the preliminary results.

Some economists had expected the index to slip slightly from an unadjusted 102.9 last month. And even with the increase, they still weren't overly optimistic about the outlook.

"Despite the latest improvement in the index, there is little to suggest that the pace of economic activity in the final quarter of 2006 is anything but moderately better than its uninspiring performance earlier this year. Given the seesaw pattern in recent months, it is too soon to tell if this boost in confidence is a genuine signal that better times are ahead," said Lynn Franco, director of The Conference Board Consumer Research Center, in a statement.

In prior months, the index reflected consumers' pessimism about deteriorating labor conditions. In contrast, December's surge showed a more positive view of the outlook for jobs.

Consumers in the December survey who said jobs are "hard to get" fell to 21.2 percent from 22.1 percent last month, while those who said jobs are "plentiful" rose to 26.9 percent from 25.7 percent. To be sure, the outlook of consumers for the next six months reflects a more accurate read on the state of purchasing power since the overall confidence survey and its early cutoff date for preliminary results is considered a backward reflection of what consumers think and feel about the economy.In that sense, December's results regarding outlook were a bit more encouraging than last month's. According to the conference board, consumers anticipating business conditions to get worse dropped to 7.9 percent from 8.5 percent, while those who said business conditions will get better inched up to 16.3 percent from 16 percent. The outlook for the labor market in the months ahead showed a slight improvement as consumers expecting more jobs to become available increased to 14 percent from 13.3 percent, while those anticipating fewer jobs dropped to 15.9 percent from 16.1 percent.

Maury Harris, economist at UBS, wrote in a research note Thursday, "If the current level of the Consumer Confidence Index is maintained, the Expectations Index, which correlates more closely with the rate of growth in consumer spending than the present situation or overall indexes, looks consistent with a trend in real consumption growth of around 3.5 percent at an annual rate."

James Rice, analyst at Susquehanna Financial Group, observed, "Consumer confidence has been bouncing around, and that in and of itself may be somewhat misleading. I think spending will slow a little bit, but I don't foresee any major slowdown happening. Consumers have been incredibly resilient to this point. What is also a factor are the mixed signals regarding the economy. There was concern earlier in the day that an improved economy, and consequently inflations fears, might have the Fed raising interest rates sooner rather than later."

Investors spent Thursday digesting the market reports, including one that measured existing home sales. Investors initially sold off shares over concerns interest rates could go up sooner. Trading in the early afternoon reversed course as the market rebounded, but then resumed its earlier sell-off. Shares of retail stocks were mixed, with the S&P Retail Index down 0.20 percent to close at 500.11. Among the losers were jewelry retailer Finlay Enterprises, which closed at $8.06, down 3.2 percent; The Dress Barn, $23.27, down 2.5 percent, and Hibbett Sporting Goods, $30.76, down 1.9 percent.

Rice observed that a combination of weather and lack of hot fashion helped curtail apparel sales during the holiday period. "It was really weird. I think Christmas was worse than people expected. One thing you didn't see this year was the consumer making self-purchases, particularly of cold-weather apparel and accessories." He also noted that online sales took away market share from sales at traditional brick-and-mortar sites.Amazon.com said earlier this week that the 2006 holiday season was its best ever, with the busiest day on Dec. 11, when customer orders exceeded four million items. In apparel and accessories, Levi's 501 Button Fly Jeans were top sellers, while in the jewelry category, 14-karat white-gold round diamond stud earrings were the preferred choice by shoppers. The top beauty selection was the Bare Escentuals Get Started Kit.

Michael Neimira, chief economist with the International Council of Shopping Centers, in a conference call Wednesday hosted by retail analyst Christine Augustine at Bear, Stearns, said the ICSC is forecasting a 2.5 percent same-store sales gain for the November-December period. He noted the shopping pace slowed this year, as only 24 percent of consumers said they started their holiday shopping before Oct. 31, versus 29 percent in 2005. He also said gift cards could account for between 13 and 15 percent of holiday sales, or about $30 billion to $40 billion, respectively, with 10 percent redeemed during the last week of December and another 40 percent in January.

Analyst William Dreher of Deutsche Bank wrote in a research note Thursday, "Though sales accelerated in the final three days before Christmas, we believe that these improvements may not have been enough to offset early month softness ... Gift cards should help drive post-Christmas sales, but will likely be too little, too late."

Analyst Deborah Weinswig at Citigroup Global Markets noted in her report that the last week of December is "crucial" as retailers try to salvage the overall sales season with a focus on gift card redemptions. She cautioned that while markdowns have remained in line, there might be some aggressive action next month if the anticipated "cold snap" during the last week of December and the month of January fails to occur, which would further impact cold-weather and outerwear sales.

Analyst Jennifer Black of the firm that bears her name wrote in a research note that she expects Nordstrom to post the strongest results for the season, with Amercian Eagle Outfitters a runner-up. Victoria's Secret also fared well as gift card sales appeared to be up significantly, Black wrote. She observed that online sales pulled some sales from brick-and-mortar stores, and that stores in general that catered to Baby Boomer women did not fare well during the holiday. Chico's and Talbots were cited as retailers that had light traffic levels during her retail store visits.According to the Dec. 27 issue of The Pulse report from retail consultancy firm WSL Strategic Retail, one major trend that retailers need to address in 2007 is how to "coax" shoppers to buy more. WSL's opinion is that creative presentation at point-of-sale, including the Web and even in-store sampling, will be more important to get shoppers to buy. Their view, too, is that shoppers use gift cards to purchase "sale items, not for a full-price splurge."

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