Retailers Finding No Joy in the Holidays

"Retailers have done a terrific job of taking costs out of the supply chain," said Ernst & Young's McIntosh. "Because of their improved cost structure, they are able to have some level of profitability even at such reduced prices."

And the decline in sales doesn't necessarily imply that consumers have stopped spending. Not only are prices lower, but consumers are spreading their dollars around at a greater number of stores. Chains such as Wal-Mart, for example, have dramatically increased their square footage, increasing the likelihood of new stores stealing sales from older ones.

Meanwhile, stores that used to compete only with other companies in their niche are finding a broader range of competitors offering similar products. Instead of going to an electronics store such as Best Buy (BBY Quote - Cramer on BBY - Stock Picks) to buy a digital camera or DVD player, consumers can find much the same selection at a discounter such as Wal-Mart, a wholesale club such as Costco (COST Quote - Cramer on COST - Stock Picks) or a department store such as Sears.

"If store comps are not as strong as a year ago, you can't look at that and say consumer spending is weak," said Rob Wilson of Tiburon Research Group. "There are simply more stores out there."

But the glut in stores could lead to a shakeout, Wilson said. Gap, for instance, has promised to cut the square footage it operates by 2% through store closings, he noted.

"I think that was a shot across the bow. I think you're going to start seeing more of that next year," Wilson said. "Investors who are looking for growth are not going to look at the retail sector next year."

In the meantime, the increased competition and discounting has put retailing in a deflationary cycle, said Richard Hastings of Cyber Business Credit. Many consumers are delaying their spending because they expect retailers will drop their prices. And retailers are dropping their prices to try to encourage consumers to come into their stores. While retailers find it relatively easy to predict sales in an inflationary environment, few know how to deal with a deflationary one, Hastings said. "Deflation is very hard to deal with," he said.

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