Retail is limping into the holiday season.

This story first appeared in the November 4, 2011 issue of WWD. Subscribe Today.

Persistently high unemployment, the gyrating stock market, continued economic volatility in Europe and retailers’ favorite excuse — the weather — delivered stores their first comparable sales miss of the year in October, proving consumers remain skittish even as most analysts continue to forecast a strong uptick at holiday.

“Without events like back-to-school or holiday to drive shoppers to stores in October, consumers stayed at home to wait for holiday deals and cold weather before hitting the stores,” said Citi broadlines analyst Deborah Weinswig, who added that despite “soft comps,” third-quarter earnings results “remain intact, as inventories are well controlled.”

There even were hints of weakness in the high-flying luxury market, with Nordstrom Inc.’s comps gaining 5.4 percent after a 10.7 percent rise in September. Saks Inc. posted a 1.8 percent October increase after a 9.3 percent gain the preceding month, although the exclusion of cosmetics and fragrances from its four-day Friends & Family discount event dragged the gain down from what would have been a mid-single digit advance.

Wall Street shrugged off the poor comps figures, however. The S&P Retail Index rose 1.1 percent, or 6.09 points, to 540.90, but lagged the Dow Jones Industrial Average, which gained 1.8 percent, or 208.43 points, to 12,044.47 after Greece cancelled a referendum on the European Union’s debt bailout plan. The vote, which threatened to tear the EU apart, would have at the very least left the region’s debt crisis in limbo for another month.

But even if the fiscal troubles in Europe finally recede, U.S. retailers are not yet on solid ground.
Shifts in the weather were only a small part of the October sales story, said Hana Ben-Shabat, A.T. Kearney retail consultant and partner.

“We are starting to see a little bit of a pullback,” Ben-Shabat said. “October sales are below expectations but they aren’t that off…but I think as we move into November and December, it will be tough to hit targets. Consumers are thinking twice about spending, looking for bargains and purchases that provide value at a price.”

The International Council of Shopping Centers said overall October comps rose 3.7 percent on a year-over-year basis, trailing the group’s forecast of a 4.5 percent rise and the fiscal year-to-date gain of 5.1 percent. In November, the ICSC anticipates comps will rise 3.5 percent to 4 percent.

Despite last month’s deceleration, most analysts expect holiday sales to be up a few percentage points over last year.

“The numbers are still solid, but they reflect that the economy is still fragile,” said Barbara Kahn, director of the Jay H. Baker Retailing Center at the Wharton School of the University of Pennsylvania.

She said consumers are in “conservative mode” and that outside of obligatory purchases, shoppers will be reluctant to spend unless there’s a “hot ticket item.” Unfortunately, that item has yet to materialize. Holiday looks aren’t trendy enough and there isn’t much innovation when it comes to electronics this year, Kahn said. As a result, retailers will need to drive traffic with creative sales and marketing efforts.

Kahn said that while retailers are well versed in how to manage inventories and strategically cut prices, what they are now grappling with is how to “merge their online and offline businesses together,” which includes learning how to localize their collections for different markets.

Macy’s Inc., which reported a 2.2 percent comp increase, has been focusing on local markets and rolling out new merchandise. Competitor Kohl’s Corp., which has also been adding to its assortment with the launch of the Jennifer Lopez and Marc Anthony lines, saw its comps rise 3.9 percent.

Tightly managed inventory helped Limited Brands Inc.’s Victoria’s Secret and Bath & Body Works, which posted strong comp gains of 9 percent and 6 percent, respectively.

“Retailers that aren’t able to spend that capital to compete with great product, strategic localization efforts and strong customer service are falling behind,” said David Bassuk, head of the global retail practice at AlixPartners. “The experience in the store is becoming more and more important.”

Midtier retailers continued to slog away, with The Bon-Ton Stores Inc. and J.C. Penney Co. Inc., reporting comp declines of 10.2 percent and 2.6 percent, respectively.

Gap Inc. posted a 6 percent dip, pulled down by a 1 percent comp decline at Banana Republic, a 5 percent dip at Gap North America and a 9 percent decline at Old Navy.

Despite the company’s best efforts to run aggressive promotions across all three brands, customers weren’t biting, said Stifel Nicolaus analyst Richard Jaffe, who added that he anticipates margin erosion in the company’s third-quarter earnings.

While lackluster merchandise continues to plague the Gap and Banana Republic, Old Navy’s moderate-income consumer is struggling in the unstable economy, he said.

“Although the Old Navy division faces rising product costs, the company has decided to keep prices low and competitive, while sacrificing some merchandise margin in an effort to gain market share,” Jaffe said. “We believe that this strategic decision is the correct one, particularly because we anticipate that the product cost inflation will reverse in 2012.”

Even so, the main issue on the minds of retail experts and economists is unemployment.

“The consumer is not going to spend until unemployment changes and unemployment is not going to change until retailers [and other companies] start hiring,” said AlixPartners’ Bassuk. “It’s a game of chicken.”