Tech Awaits Holiday Gift

Electronics makers are still hoping that consumers can bring them bountiful year-end results.
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The end of the year is in sight, but there seems to be no end to the speculation on whether consumers will successfully drive another holiday shopping season.

Early last month, with gasoline at nearly $3 a gallon in some regions, with hundreds of thousands displaced and out of work due to the hurricanes Katrina and Rita, and with disappointing retail sales in September, many analysts

have worried about holiday sales, particularly in consumers electronics.

Those fears have abated somewhat as gasoline prices have dropped, but few analysts are ready to predict hopping holidays.

Other factors such as home-heating prices and price deflation could weigh on overall spending, in the electronics sector particularly, says Jay McIntosh, a retail industry analyst at Ernst & Young. "I think there are a lot of question marks as we go into the holiday season," says McIntosh. But, he admits, analysts had similar concerns going into the last two holiday periods, "and those

results turned out be good."

(In other retail-related news,

TheStreet.com's

Nick Godt looks at

consumer spending overall while

Nat Worden takes a look at

Federated Department Stores'

(FD)

prospects.)

This year has been a particularly confusing one to predict, with indicators going in both positive and negative directions. For their part, bulls can point to:

Fundamental strength in the overall economy. The gross domestic product grew 3.8% in the third quarter, which was higher than analysts' estimates.

Although retail sales were disappointing in September, they bounced back in October. Some analysts say this shows the economic impact of the hurricanes is not nearly as extensive as initially feared.

In recent years, consumers have devoted increasing portions of their holiday spending to electronics products, a trend that looks like it will continue this year. Of the top gifts consumers plan to give this holiday season, three of them are electronics-related, according to a recent survey by America's Research Group.

A number of electronics products look like surefire hits this holiday season.

Apple Computer

(AAPL) - Get Report

, for instance, already has seen strong demand for its new flash-based iPod nano, selling more than 1 million in the first 17 days after its release. Likewise, many analysts expect

Microsoft

(MSFT) - Get Report

to easily sell out of the 1 million or so Xbox 360 game consoles it's expected to ship this holiday season.

"If you had talked to me two months ago, I would have painted a much different picture," says Ken Perkins, president of Retail Metrics, a research group that tracks monthly sales data. Now, he says, "it looks like it will turn out to be a decent

holiday season."

However, bears have data of their own:

Despite the strong GDP numbers, the economy generated only 56,000 jobs in October, about half of what analysts were expecting. The poor showing was likely not attributable to the hurricanes, according to the Labor Department; analysts blamed fears of weak consumer spending.

If the cool weather comes early, consumers could well close their wallets. Many analysts are expecting home-heating bills to skyrocket this year. Holiday sales are increasingly being driven by last-minute shopping, which could be hurt by consumers getting steep heating bills in the days or weeks before Christmas.

For companies not named Apple, there's been a recent wave of electronics and technology companies warning of disappointing sales or of a cautious retail environment. Among those chiming in:

Take-Two Interactive

(TTWO) - Get Report

,

Dell

(DELL) - Get Report

and

Electronic Arts

(ERTS)

.

How this confluence of factors works out is in "anyone's guess" territory. But for now, many industry analysts and executives are weighing in on the side of caution.

In the consumer electronics sector, ongoing price deflation is holding much of the bullishness in check. The prices of many electronics goods are continually falling as new and better products come out, while mass-marketing makes the older products commodities. And many analysts expect this year to see pointed price competition in the electronics sector, particularly in the area of LCD and plasma televisions, as discounters such as

Wal-Mart

(WMT) - Get Report

drop prices to lure in customers.

While falling prices are good for consumers, they can be tough for retailers and manufacturers, because they force companies into selling increasing number of products to show annual sales growth.

"I think consumer electronics is going to have a very strong year" in terms of unit sales, says McIntosh. "

But the big issue is how do

companies grow their top line because of the discounts."

Retailers are already being cautious. In recent days, a number of video-game software makers, including Take-Two, warned that retailers were ordering fewer games than expected for coming periods. "We saw a little more of a cautious environment in the marketplace," said Take-Two CEO Paul Eibeler.

But some analysts say retailers are merely doing what they've been doing in recent years: limiting their inventories and exposure until it becomes clearer which products are selling and which aren't.

"There's no reason for

electronics retailers to overbook," says Richard Hastings, a retail sector analyst with Bernard Sands. From November through January, when many purchases are made with holiday gift cards, retailers have a two-to-three-month window to sell products, giving them time to figure out what's selling. "Why

should they put themselves at risk?" he asks.

With only two more weeks left until holiday shopping begins in earnest, how companies manage that risk may well decide the season's winners and losers.