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Retailers' Holiday Season Was Good, Not Great

A surge late in the season helped overcome a sluggish start. Gift cards pushed some sales into 2004.

The holiday season finished on an up note for retailers, but investors may still be disappointed by many companies' final sales and earnings tallies.

"It turns out to have been a good, but not great

holiday season," said Michael Niemira, chief economist and director of research at the International Council of Shopping Centers. "Under the circumstances, that's the best we could have hoped for."

Those circumstances include an economy in transition, where economic growth and stock market performance have outpaced job growth. Other factors include the declining importance of holiday sales, the continuing downward pressure on prices and the growth in sales of gift cards.

Overall, retailers likely posted strong sales growth. But stores that cater to more affluent shoppers saw the lion's share of that growth. Analysts warn that more mainstream stores not only struggled for sales but also relied on potentially costly discounts to lure customers.

Those companies' struggles may surprise some investors who saw the economic recovery as a reason to bid up shares of many retailers. The S&P Retail Index jumped 42% last year. The index did stumble in early December, however, as savvy investors sensed the holiday season wouldn't prove to be a blockbuster.

Early Warning, Late Push

In late November, many retailers

warned that their holiday and fourth-quarter results might not be as good as analysts and investors were expecting.


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, for instance, gave guidance that was

a penny below Wall Street's estimates, saying it wasn't seeing the pick up in consumer spending that others were observing. Other leading retailers also warned that they might not meet analysts' fourth-quarter expectations, including


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Abercrombie & Fitch

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By the time the new year rolled around, Wal-Mart, Target and

Best Buy

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had all

reported December sales were coming in below their plans. Meanwhile, industry-wide sales surveys indicated that while holiday sales were coming in stronger than in 2002, they weren't quite as robust as some of the more optimistic pre-season projections.

There have been some signs of improvement, however. Both

Wal-Mart and

Target reported their sales last week were above plan. Meanwhile, Redbook Research's industry-wide survey indicated retailers' same-store sales grew 3.9% last week over the same period a year earlier, making it the strongest week of the month.

But the last-minute surge wasn't enough to get sales completely back on track. Wal-Mart and Target both said their December sales were still coming in at the low-end of their projected ranges despite the big late-season push. Redbook said overall same-stores sales growth in December was coming in at 3.2%, below its 3.8% target.

Two-Tiered Market

The key problem for many retailers was that while affluent consumers have obviously returned to the stores, middle- and lower-income shoppers remained frugal.

Unemployment is still relatively high, noted Richard Hastings, chief economist and retail analyst at credit firm Bernard Sands. In addition, refinancing activity, which boosted consumer spending over the last couple years, has collapsed in recent months, he said.

"The lower-income and middle-income population -- they don't have a lot of buckets to reach into," Hastings said. "They're worried about their jobs."

Those same Americans also worry about the prices they pay. Many consumers waited until the last minute to do holiday shopping in full expectation that they'd get better deals, analysts say.

"They forced the industry into its reducing prices," Hastings said. "It shows yet again that the consumer is very much in charge."

Those discounts may cut into company profit. Many middle-market retailers had wanted to avoid discounts this year to improve their bottom lines, said Jay McIntosh, a retail analyst at Ernst & Young.

"It's pretty tough for retailers to try to compete other than on price, particularly the mid-tier retailers," McIntosh said. "My guess is that

most mid-tier retailers won't have strong sales growth, and won't have strong profit growth, as well."

But other analysts are less concerned about the discounting. Many retailers now offer promotions based on computerized-models that try to maximize prices while minimizing inventory overhang, said Craig Johnson, president of retail consulting firm Customer Growth Partners. Typically, that means that their markdowns don't cut too much into the bottom line, he said.

"In some instances, you're going to have panic markdowns, but in most cases,

markdowns are much less of an art and more of science," Johnson said.

Perhaps as important a factor in holiday sales as the markdowns was the growing use of gift cards, Johnson and other analysts said. Retailers don't record sales of gift cards until they are redeemed.

Johnson estimates that gift cards now comprise 8% to 12% of total holiday purchases, meaning a large chunk of holiday spending doesn't get recorded immediately. Gift card redemptions end up boosting post-Christmas and January sales, he said.

"The use of gift cards means that the holiday season may have ended, but holiday shopping continues," said Niemira.

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