Get Ready for Very Weak Retail Comps

Retailers are set to report September sales trends over the next few days, and if just-released data from MasterCard (MC Quote - Cramer on MC - Stock Picks) are any indication, the numbers should be even worse than analysts' cautious forecasts. According to the credit card transaction processor, September retail sales were off 5% to 14% from a year ago, with double-digit drops in sales of furniture, electronics and appliances.

Sales in the first half of the month were apparently down 3% to 4% but fell at a deeper 6% to 7% clip in the last two weeks of the month, as the credit crisis spooked consumers. The credit crisis will eventually drop from the headlines, but consumers are likely to keep away from malls in droves.

Consumers are facing a host of negatives and a few small positives. The negatives:

• Unemployment rolls are expanding.
• Credit card balances are high, and some analysts expect to see delinquencies rise at a fast clip. The addiction to credit has been the key catalyst for steadily rising discretionary purchases over the last decade.
• Access to college student loans is getting harder, leading many parents to save for school at an accelerated rate. That could have a big impact on teen-based retailers.

The positives:

• Gasoline prices are now falling, and that frees up some cash for other items.
• Few consumers are buying new homes right now, and theoretically they have better cash flow to support other purchases.

At this point, it's safe to assume that the upcoming holiday season will be bleak for most retailers. A number of them make enough profit in the fourth quarter to more than offset losses in the seasonally weaker quarters. That may not be the case this time. Even for those that are profitable throughout the year, two major concerns are bound to emerge.

First, inventories could rise quickly if sales growth remains negative. And that could lead to another round of brutal price discounting. As Neiman Marcus noted in its fourth-quarter conference call in late September:

"In planning for this fall's purchases, we did make adjustments to reflect a lower expected sales trend. However, the environment has deteriorated further ... than we had anticipated six months ago when we made our initial fall buys, and therefore, is currently putting more pressure on our inventory levels."

Second, retailers have typically relied on borrowing to run their businesses, and the combination of lower-than-expected cash flow, too much working capital tied up in inventory and gummed-up credit markets could lead to some liquidity concerns.

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