THE PRE-XMAS BLUES: CONSUMER CONFIDENCE HITS 7 1/2-YEAR LOW

Byline: Jennifer Weitzman / With contributions from David Moin

NEW YORK — It’s continuing to look a lot like a dismal Christmas at retail.
As stores head into the key pre-holiday season, their gloom was deepened Tuesday when it was revealed that consumer confidence dropped to a 7 1/2-year low in October.
The Conference Board said that its monthly reading fell 11.5 points — from 97 in September to 85.5 in October — the lowest level since February 1994. At that time, the reading was 79.9, unemployment was falling and confidence rising, albeit from recessionary low points.
This month’s reading marked the fourth straight Consumer Confidence Index decline. “The economic outlook is becoming increasingly pessimistic, with consumer sentiment continuing to fall,” Lynn Franco, director of the Conference Board’s Consumer Research Center, said in a statement. “Widespread layoffs and rising unemployment do not signal a rebound in confidence anytime soon.”
Nor does the current condition of the retail marketplace. John Shanley, an analyst with Wells Fargo Van Kasper, said mall traffic is down in the mid-single-digit range as fear of being in a shopping center increases. Teenagers are shopping more than their baby-boomer parents.
Retailers in New York are already agonizing over the lack of business, particularly luxury purveyors with significant international clientele. The city was abuzz about Bergdorf Goodman’s four-day storewide sale, Oct. 25-28, offering 30 percent off all merchandise, except cosmetics, fragrances and items in some leased departments. The store sent out invitations to preferred customers, but even those who came to the store without the card could get the discount. The store was packed over the weekend, and noticeably quieter on Monday.
“I think it’s a very difficult atmosphere,” acknowledged Michael Gould, chairman and chief executive officer of Bloomingdale’s. “There’s a pocket here, a pocket there, where some things are doing better.” He cited the Fire Zone shop, opened last week at the 59th Street flagship, that over the weekend posted $17,000 to $18,000 in sales each day, against around $5,000 to $6,000 on the weekdays.
At stores across the price spectrum, Americana — including flags and clothing adorned with Old Glory — has been selling, But there’s an imbalance in inventories and consumer demand. When asked if the holiday season would be more promotional, with more pre-Thanksgiving Day discounting, another New York retailer said, “You are seeing more sales. What are you going to do with all the merchandise? Things aren’t getting better.”
Stock prices retreated further Tuesday, erasing last week’s gains, as investors were spooked by the confidence woes and roused by the opportunity to scramble for profits. All three indices bled red: The Dow dropped 147.52 points, or 1.6 percent, to 9121.98; the Nasdaq retreated 32.19 points, or 1.9 percent, to 1667.33; and Standard & Poor’s Index shed 19.30, or 1.8 percent, to 1059.
Specialty retailers bore much of the brunt of investor jitters on Tuesday, as many stronger performers suffered through declines of 5 percent or more in their stock prices. Abercrombie & Fitch and Chico’s FAS both dropped 8.5 percent, to $17.70 and $25.45, respectively; while Urban Outfitters declined 9.2 percent, to $12.20. Coldwater Creek was off 8.1 percent, to $18.75; and Talbots, 7.7 percent, to $27.42.
Department and discount stores weathered less precipitous drops, although J.C. Penney Co. declined 8.7 percent, to close at $21.27, and Kmart saw its shares contract 7.6 percent, to $5.74.
Analyst Todd Slater of Lazard Freres said retail and apparel stocks are underperforming the rest of the market. “There was an unusual run-up in the group after the September [same-store] sales results came out and when it seemed October was improving after the Sept. 11 attacks,” he said. “But the reality is October is not turning out well for apparel retailers.”
The Conference Board reading, which came in lower than already depressed forecasts, indicated that consumer confidence is not expected to rebound anytime soon. Pessimism in consumer confidence usually foreshadows a drop in consumer spending, which makes up two-thirds of an economy that some say is already in a recession. Today’s results could further darken an already gloomy landscape.
Putting the current situation more bluntly, John Lonski, an economist with Moody’s Investors Services, said this month’s reading is “worse than expected” and blamed the current environment on last month’s terrorist attacks. “The overall economy is in danger of plummeting unless something is done to enhance national security.”
To be sure, Lonski said the mood does little to drive consumers back to the malls and that retailers should be braced for one of the worst holiday selling seasons. “Unless shoppers feel less threatened, tax rebates and federal rate cuts will have minimal effect on driving the economy,” he said.
The biggest decline in the confidence index came from consumer assessment of current conditions. The Present Situation Index, which constitutes one-half of the monthly confidence component, fell to 107.6 in October, a 17.8 point drop from the 125.4 recorded in September.
Those consumers rating current business conditions as “bad” rose to 20.6 percent from 18.3 percent. Those rating conditions as “good” declined to 18.9 percent from 22.3 percent. And consumers claiming jobs are “hard to get” rose to 20.7 percent from 18.8 percent; while those reporting jobs are plentiful fell to 21 percent from 27.1 percent.
Consumers’ outlook for the next six months continued to deteriorate, though not as rapidly. The Expectations Index — a measure of consumer sentiment for the short term that represents the other half of the index — fell to 70.8 in October, a 7.3 point drop from its 78.1 reading in September.
While consumers expecting an improvement in business conditions over the next six months increased to 18 percent from 15.7 percent, those anticipating conditions to weaken rose to 20.3 percent from 15.8 percent.
The employment outlook was also mixed. Currently, 14 percent of consumers expect more jobs to become available, up slightly from 12.9 percent last month. But those expecting fewer jobs increased to 28.9 percent from 22.5 percent. And only 17.7 percent of consumers reported they anticipate a gain in their incomes, down from 21.1 percent in September.
The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households. The index compares results with its base year, 1985, when it stood at 100.
Investors are awaiting more government data which could further point to a recession, including October’s job numbers and third-quarter growth.
Lonski noted that he fears consumer confidence could drop to the low levels recorded during the Gulf War, a frightening prospect made more likely by the invisible nature of the country’s current adversaries.
In July 1990, the index measured 101.7, but fell as low as 55.1 in January 1991, the start of the Gulf War, and it averaged 72.6 throughout the war and the recession that followed. Lonski would not give assurances that a similar or even sharper nosedive might not develop in the current situation.
Calling it a recession, Sohn Won Sohn, chief economist with Wells Fargo & Co., said: “If the war on terrorism goes well, we can get away with a mild recession and consumer confidence will rebound, but if the war does not go well, then we are looking at lower consumer confidence and a deeper and prolonged recession.”
Lazard Freres’s Slater said he does not believe the industry has hit the bottom. “People are bunkering down and are buying need-to-have items before buying consumables.”