Troy Wolverton

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Last-Minute Shoppers Unlikely to Save Retailers

Troy Wolverton

Sales are up this year, but retailers still might not have a happy holiday season.

With just three days before Christmas, time is running out for retailers such as Target (TGT Quote), Wal-Mart (WMT Quote) and Best Buy (BBY Quote) to make up for slower-than-expected December sales. With myriad factors weighing on retailers, some analysts doubt even the expected final shopping spree before Christmas will salvage the month.

"It's not going to happen," warned Richard Hastings, chief economist and retail analyst at credit firm Bernard Sands. "I don't expect to see any positive reversal to the weak holiday selling season."

Retail sales this holiday season are being hit by a number of factors. While improving, the jobs picture is still poor, particularly for lower-income workers. Severe weather on the East Coast depressed sales in that region earlier this month. Meanwhile, consumers are shifting increasing amounts of their spending away from December to January, particularly as gift cards have become more popular.

"There's no question that the holiday sales season has been disappointing for many retailers," said Kurt Barnard, president of consulting company Retail Forecasting.

The bad news for investors is that after a booming third quarter, holiday expectations may have gotten ahead of reality. Many retail stocks have posted heady gains this year, leaving them vulnerable as the holiday season didn't live up to overly optimistic expectations.

After hitting a 52-week high of 384.28 on Nov. 28, the S&P Retail Index stumbled nearly 8% in 12 subsequent trading days. Individual names such as Circuit City (CC Quote) suffered greater declines.

Still, the Retail Index remains up nearly 40% year to date, while Best Buy's shares are up 119.1% and Target's are up 27.7%. Shares of apparel chain Pacific Sunwear (PSUN Quote) have jumped 76.5% this year.

Those and other names in the sector could be at risk if sales -- or earnings -- come in below expectations.

Sales Bar Set Too High

To be sure, this holiday season will likely be much better than last year's. Core retail sales -- which include results from general merchandisers, apparel stores, furniture and home furnishings outlet, sporting goods and other stores -- grew by just 1.6% last December and just 2.6% in November last year. Those numbers marked one of the worst retail holiday seasons in years.

In contrast, this holiday season has gotten off to a much better start. Core retail sales grew by 4.8% last month, the National Retail Federation estimates. Retail analysts have projected that such sales will rise more than 5% in December. But despite the year-over-year improvement, overall sales at core retailers trail the 5.7% pace forecast by the NRF for the combined November and December period. Even the e-commerce sector, which has been the source of some of the fastest growth in retail, appears to be growing slower than some analysts projected this holiday season.

Of course, some retail chains could have a joyous holiday season. Analysts are projecting that retailers catering to more affluent shoppers, such as Tiffany's (TIF Quote), Neiman Marcus Group (NMGa Quote) and Nordstrom (JWN Quote), will see strong sales.

"The top 35% of the population in terms of wealth, they're doing fine," said Hastings. "They're doing quite a bit of shopping at good price points."

But many other companies may have less to celebrate. Wal-Mart, most notably, on Monday repeated earlier statements that its same-store sales in December are coming in at the low end of its projected 3% to 5% range. (Same-store sales compare results at like outlets open for more than one year.)

The company warned investors and analysts last month that it wasn't seeing the pick-up in consumer spending that investors and analysts were expecting. Indeed, guidance from many retailers heading into the holiday season did not match the ebullience of analysts and investors.

Wal-Mart isn't the only one having troubles. Rival discounter Target said that its same-store sales in the first couple of weeks of December have actually been below its plan of 4% to 6% growth. Best Buy echoed Target, saying its same-stores sales this month have been below its own goal of 6% to 8% growth.

Although the economy appears to be picking up, the labor market remains unstable. That's helping to keep down sales at many retailers, analysts say.

"Middle-class Americans are profoundly worried about their jobs. Many of them are financially ill-prepared for the future," said Hastings. "The situation becomes even more challenging for lower-income populations."

Many companies also had to contend with the severe winter weather earlier in the month. The poor weather forced stores to shut down and discouraged people from going outside to shop. Best Buy blamed its disappointing sales to date in part on the weather.

"To the extent that weather was the story, this [past] weekend [was] exceedingly important," said Michael Niemira, chief economist and director of research at the International Council of Shopping Centers.

Some analysts argue that retailers will be OK, no matter how holiday sales turn out. Consumers have been increasingly shifting their spending from December to other months, they note. That means that even if holiday sales come in below plan, retailers still have time to make their quarterly revenue or earnings numbers.

At least part of that shift can be explained by the increasing use of gift cards. Sales of gift cards now represent about 8% to 10% of holiday retail spending, analysts estimate.

But such spending can skew retailers' holiday results. Although consumers often purchase gift cards in December, retailers don't recognize revenue from such cards until they are redeemed, which often occurs weeks or months after Christmas.

"Gift cards really don't affect total sales," said Craig Johnson, president of retail consulting firm Customer Growth Strategies. "But they dramatically affect [same-store] sales," which seem unlikely to produce the kind of gains many investors were betting on this holiday season.