Fueled by pent-up demand and shrinking inventory levels, retailers can expect sales to rise by as much as 2 percent for the holiday season.

This story first appeared in the November 5, 2009 issue of WWD. Subscribe Today.

That was the conclusion of a team of analysts from Citigroup Global Markets, who spoke at the Retail Marketing Society’s “Christmas ’09: The Retail Forecast” event at the Fashion Institute of Technology on Wednesday.

Providing the macroeconomic view, Steven Wieting, U.S. economist and managing director, forecast a gain of zero to 1 percent this year. Wieting said his forecast would have been for a 2 percent rise, which he termed a “weak normal,” except for rising gasoline prices. He noted consumer spirits have been improving slightly as a result of the rising stock market and stabilizing credit and wages. “Most fundamentally,” Wieting wrote in a research report, “sales appear to be benefiting from a pent-up demand as severe caution about potential job losses sent discretionary merchandise sales down 9 percent in the year through December 2008.”

Nevertheless, he said energy costs are expected to rise 7 percent in November and “dent the upward momentum.” He said GDP in the fourth quarter is expected to increase less than the third quarter, 2 percent versus 3.5 percent, respectively, but “next year, we’ll gradually fade the negatives out.”

His sentiments were echoed by Deborah Weinswig, managing director and senior retail analyst for broadlines at Citi. She said results from the company’s inaugural holiday survey found “consumers plan to shop earlier” as they find a “real lack of inventory.” She said that in recent visits with executives from Nordstrom Inc. and Belk Inc., both were considering bringing in spring merchandise in December in order to stock shelves. As a result, consumers will need to buy early and not wait for promotions this year, she said, in order to get the gifts they want.

Second, “lean inventories could be a headwind for retailers.” Inventories are down more than 6 percent and should help retailers boost their gross margins. “However, we are concerned that with consumers shopping earlier this year, retailers may run out of merchandise by late December, running the risk of lost sales,” the survey said.

Third, “value will drive purchases,” and discount stores are expected to be the primary beneficiaries of consumer interest, she said, followed by department stores and then large specialty stores.

She said more desirable fashion trends — skinny jeans, leggings, tunic tops and “the color purple” — are also “driving traffic to the mall.”

Overall, Weinswig said she had a “constructive outlook” and forecast a gain for the holiday selling period of 1 to 2 percent. She noted promotions are not nearly as aggressive as last year in apparel and accessories, which should bolster earnings for retailers in the fourth quarter. She singled out J.C. Penney Co. Inc., Macy’s Inc. and Target Corp. as among those stores expected to perform best this year. She noted Penney’s new Manhattan store, expected to be the top volume producer in the chain with sales of $125 million, as a boost to the company’s image, as well as its moves into social media and new private brand launches. Macy’s, with its new centralized structure coupled with the My Macy’s localization initiative and its “amazing pool of talent,” is also getting a “leg up” on the competition, she said. And Target’s “improved value message” and rollout of fresh food will help it improve its fortunes as well.

Kimberly Greenberger, managing director and senior retailing analyst for specialty apparel, also projected a 1 to 2 percent rise in comp-store sales this holiday. Inventory levels in this part of the market are down 8 to 10 percent and mall traffic is up 1 to 2 percent, further boosting expectations for stores. As far as fashion trends, she said plaid shirts, denim, leggings, Eighties looks, jewelry, scarves and fur will attract consumer attention. She said Anthropologie, J. Crew, American Eagle Outfitters, Old Navy and Gap “look good this year,” and that her top stock picks are American Eagle Outfitters Inc., Limited Brands Inc. and Tiffany & Co.

Turning to the manufacturing sector, Kate McShane, director and senior retailing analyst for apparel and footwear, said the cuts in inventories at retail have led her to a “more cautious” outlook. She said consumers are still “placing a premium on promotions,” but the level of discounting will be lower this year. In 2008, she said, 72 percent of all merchandise was on sale at an average of 44 percent off. In November, she said, although the same percentage of merchandise was being promoted, it was “at a lower level.” She did not specify a figure.

She said Nike Inc., The North Face Apparel Corp., Phillips-Van Heusen Corp. and Under Armour Inc. were among the companies best positioned to gain market share this holiday.

David Wolfe, creative director of Doneger Creative Services, provided the holiday fashion forecast at the event. He said this season, shoppers will turn to “familiarity and comfort” instead of cutting-edge products for a “heartfelt” Christmas. They’ll be seeking real bang for their buck and buying “value-priced fashion items that look like they cost more than they actually did.” Purple will be the top fashion color, and other top items will include plush cozy sweaters, leather jackets, zip-front hoodies, leggings, vests, boots, plaid and flannel shirts for men and fantasy princess dresses for girls.

Also on Wednesday, research from Goldman Sachs and the International Council of Shopping Centers showed that “sales momentum slowed” at the end of October as weather turned “warmer and wetter” after a nippy, dry start.

Sales on a year-over-year basis ended the month up 1.9 percent, a deceleration from an increase of 2.4 percent and 2.8 percent in the second and third weeks of October, respectively. For the week ended Oct. 31, weekly chain store sales grew just 0.1 percent and, for the month, are expected to be flat to up about 1 percent.

The downward trend as the month progressed may take some of the life out of October same-store sales results, due out today and expected to benefit more from weak comparisons with October 2008, the first full month after the onset of the credit crisis.

“While October started out strong, we believe the return of more in-line weather patterns led to tepid results at the end of the month, even with the start of traditional end-of-season sales,” wrote Brean Murray, Carret & Co. retail analyst Eric Beder in a research note.

Beder, who anticipates weak holiday results, said he does not believe “with unemployment continuing to increase, that the consumer will be in a highly festive mood to splurge, even up against very easy comparisons.”

Todd Slater, retail analyst at Lazard Capital Markets, agreed: “Recovery may prove more elusive due to lower disposable incomes.”

Though comparable-store sales are expected to accelerate through the fourth quarter and “retail fundamentals are improving amid easing comparisons,” he is “becoming increasingly concerned about the fragility of the consumer,” as unemployment remains high and consumer confidence stumbles.

On top of that, Slater noted credit costs have “nowhere to go but up” and prices for consumables and energy are “edging higher.”

Some are more optimistic. According to Boenning & Scattergood retail analyst Holly Guthrie, that consumers are spending later in the season bodes well for the fourth quarter. “The overall increases seen in September and early October give us confidence that when consumers have a reason to spend they will,” she said.

After the market closed on Wednesday, teen retailers Hot Topic Inc. and Zumiez Inc. reported October comp declines of 2.6 percent and 8.9 percent, respectively.

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