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Digging Deep for the Holidays

Hurricane fallout and gas prices will affect consumer spending on electronics this holiday season.

Though many consumers have yet to buy their Halloween pumpkins, analysts are already worrying about what shoppers will do come the holiday season.

Electronics manufacturers and retailers are hoping that visions of music players and video games are starting to dance in consumers' -- and their children's -- heads.

But with gasoline and oil prices spiking and consumer confidence ebbing in the wake of the recent hurricanes, some analysts are wondering whether consumers will have more pressing concerns.

"This is a very tough year to project," says Jay McIntosh, Americas director of retail and consumer products at Ernst & Young. "If consumer confidence stays down, if you don't see rebuilding

in the hurricane-affected areas and if you see early discounting

by retailers, it could be a tough holiday season, with growth that will be lower than most retailers would like, at a price point that would hurt their margins."

That's disappointing news to electronics makers and retailers that are hoping for a booming holiday season after a somewhat mixed season a year ago. As with most consumer industries, the holiday season accounts for the lion's share of sales.

Some analysts see signs of strong sales this year.

Electronics Boutique


and other retailers are already reporting that they are sold out of their initial shipments of


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upcoming Xbox 360 game console and are no longer taking preorders for the device.

Meanwhile, the price of LCD televisions has started to fall below $1,000, a development that has the potential to greatly expand the market for the devices, says Craig Johnson, president of Customer Growth Partners, an industry research firm.

"We see these things literally flying off the shelf," says Johnson.

But bad news on the consumer front has also been abundant.

Hurricane Katrina wiped out New Orleans and forced the closure of numerous oil refiners. Hurricane Rita followed, inundating New Orleans and other Gulf Coast communities, delaying rebuilding efforts.

In the hurricanes' aftermath, oil jumped to more than $60 a barrel, and gasoline topped more than $3 at the pump, crimping consumers' wallets. Meanwhile, consumer confidence, as measured by the University of Michigan's survey,

recorded its biggest drop in 15 years in September, and personal income slumped in August.

Add it all up, and some analysts fret that this holiday season could mark the first time since Jimmy Carter was president that retail sales could actually fall year over year, a scenario that Britt Beemer, chairman and founder of America's Research Group, calls "likely."

"I don't want to say that -- it's not good news for my clients -- but retail is in a touchy situation right now," says Beemer.

In addition to rising gasoline prices and other factors, what worries Beemer is the drop in Labor Day sales this year, an early indicator of holiday spending, and indications in his survey data that consumers plan to spend less per gift this holiday season than they did last year.

"If that falls down,

retailers are going to have to sell more gifts to more people to equal last year's numbers," he says. "In talking to my electronics retail clients, it's a struggle out there."

In addition to the overall questions about consumer spending, the electronics industry has history to contend with. In two of the past three holiday seasons -- including last year's -- electronics sales grew slower than did overall retail spending, according to Census Bureau figures.

Last year, some retailers and manufacturers posted strong results.

Best Buy

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, for instance, saw sales jump 9% in its fourth quarter, and


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earnings quadrupled, thanks to booming sales of its iPod digital music players.

But other electronics makers and tech companies missed out on the holiday cheer.



and Microsoft, for instance, were unable to meet strong demand for their game consoles. Thanks to the hardware shortages, video-game sales also proved disappointing during the holiday season.

Before Hurricane Rita hit, Ernst & Young

predicted that overall retail sales would grow 6% to 7% this holiday season. But McIntosh says that forecast is now in doubt after Rita delayed rebuilding efforts.

McIntosh worries about the psychological effect on consumers if, come holiday season, the focus is still on the devastation wrought by the hurricanes rather than on the rebuilding effort.

And he has other concerns. Consumers might be able to swallow higher gasoline prices, because gasoline is a much smaller portion of consumer spending than it was 25 years ago. But higher oil prices are likely to translate into significantly higher heating bills this winter, which could take a much bigger bite out of consumers' wallets.

If there's an early cold snap and consumers get their heating bills before the holiday season, they could react by curtailing holiday spending, he says.

Heating bills "are much less discretionary and have a bigger effect on people" than gasoline costs, he says.

Still, not everyone is gloomy. Johnson, for instance, believes that there's little chance that holiday spending will fall year over year. And he's predicting double-digit percentage increases in electronics shipments.

Consumers have been shifting their spending from apparel and toys into electronics and other long-lasting goods, he says.

"Eight-year-old kids -- they don't want Barbie anymore. They want to own a cell phone," he says.

The consumer outlook was similarly gloomy following the Sept. 11 terrorist attacks in 2001, says Richard Hastings, a retail analyst with Bernard Sands, a credit rating agency. But spending rebounded that holiday season and could well do so this year.

"As soon as the weather cools off and the leaves turn golden-amber, you will see the first signs that, despite some damage to momentum, the spending train is still on track," he says.

"If the industry can come out with the right combination of new products and promotions, then the electronics story will go smoothly."

Still, even Hastings and Johnson are cautious, saying that electronics retailers may have to turn to costly promotions to pull in customers. And the risk remains that things could turn out much worse than they expect.

"The mood has become volatile to the downside. 'Volatile' is the key word, since it is not clear how far we will go from the psychological to the actual," Hastings says.