Wednesday, December 26, 2007

Will Last Minute Shoppers Help the Economy?

Will last minute holiday spending help the economy avoid a recession next year? This New York Times story is pessimistic:

American consumers, uneasy about the economy and unimpressed by the merchandise in stores, delivered the bleak holiday shopping season retailers had expected, if not feared, according to one early but influential projection.

Spending from Thanksgiving to Christmas rose just 3.6 percent over last year, the weakest performance in at least four years, according to MasterCard Advisors, a division of the credit card company. By comparison, sales grew 6.6 percent in 2006 and 8.7 percent in 2005.

“There was not a recipe for a pickup in sales growth,” said Michael McNamara, vice president for research and analysis at MasterCard Advisors, citing higher gas prices, a slowing housing market and a tight credit market.

Strong demand at the start of the season for a handful of must-have electronics, like digital frames and portable G.P.S. navigation systems, trailed off in December. And robust sales of luxury products could not make up for sluggish sales of jewelry and women’s clothing.

What did eventually sell was generally marked down — once, if not twice — which could hurt retailers’ profits in the final three months of year. “Stores are buying those sales at a cost,” said Sherif Mityas, a partner at the consulting firm A. T. Kearney, who specializes in retailing.
Here's more of an upbeat take, from the Los Angeles Times:

A last minute surge of holiday shoppers helped blunt what was looking like a dismal Christmas for retailers.

Sales from the Friday, Saturday and Sunday before Christmas were up 18.7% over the same period last year, according to a report from ShopperTrak RCT Corp., which monitors more than 45,000 retail stores. Sales for the week ended Saturday were up 33% over the previous week.

"Last-minute shoppers swamped stores over the weekend, allowing retailers to breathe a sigh of relief," said Bill Martin, co-founder of ShopperTrak. Martin said the busy shopping weekend helped put sales on track with his firm's forecast of a 3.6% sales gain for the holiday season over the previous year.

Those last-minute shoppers included John Shin, a 29-year-old graphic designer who was rushing around the Grove shopping mall in the Fairfax district. With Christmas Eve fast approaching, Shin needed a present for his girlfriend.

He waited until the last minute because "they didn't have sales on the things I wanted to buy," he said.

Representatives from popular retail hubs such as the Beverly Center and Westfield Century City and mall owner Santa Monica-based Macerich Co. said they had seen an increase in traffic over the weekend as shoppers who had procrastinated finally hit the stores.

That's been the case for retailers across the country, especially those selling electronics.

"It has been very busy with lots of last-minute shoppers," said Kirsten Whipple, a spokeswoman for Sears Holding Corp. "We've had very good traffic, especially today."

Some Macerich centers reported more traffic than they did on Black Friday, the day after Thanksgiving that is traditionally one of the busiest days of the year, said Phil Vise, vice president of consumer marketing for Macerich Southern California.

"It certainly has been a season of procrastination," he said. "It's really come down to the last few days."

Still, some believe all those shoppers hitting the malls this last weekend might not be enough to boost sales by any significant amount.

The International Council of Shopping Centers predicts only a 2.5% gain in holiday season sales at stores open at least a year, and Brit Beemer, chairman of America's Research Group, forecast last week that same-store sales would rise only 1.8% over the previous year. That's his lowest forecast in a decade.

Target Corp. said Monday that same-store sales for December might fall as much as 1% from a year ago. The Minneapolis-based company had previously predicted sales would rise 3% to 5%.

Actually, the figures for Target are being viewed as a larger bellwhether of the 2007 shopping season:

It was supposed to be a Target Christmas.

Buffeted by high energy costs and a slowing housing market, consumers were expected to trade down from midpriced department stores, like Macy’s and Nordstrom, to discount retailers with designer cachet — Target’s undisputed terrain.

But instead of dominating this holiday season, Target is muddling through it, perplexing rival merchants and Wall Street analysts, who consider the chain a bellwether and are scrutinizing its performance for clues on the health of the economy.

In two of the last three months — September and November — Target’s sales growth has slipped below 1.5 percent, well under its historical average and lower than its biggest rival, Wal-Mart Stores.

The chief executive of Target, Robert J. Ulrich, has warned that the company may not meet its earnings forecast for the final three months of the year, on the heels of a third-quarter performance that he described as “disappointing.”

Behind the slowdown, analysts suspect, is a pullback on routine purchases of housewares and clothing, Target’s traditional strengths — and, in general, the most profitable merchandise in its stores.

In flusher times, Americans snapped up Target’s $40 taffeta dresses designed by Isaac Mizrahi and $9.99 plush towels from Thomas O’Brien. But with shoppers anxious about the economy, they appear to be skipping the splurges.

Linda Shannon, 56, a retired nurse in North Bergen, N.J., adores Target’s sheets and towels, but she walked right by them last week at her local store. “In this economy, what we have at home is good enough,” she said.

Target is by no means losing money; it remains one of the most profitable chains in the country. But in retailing, analysts and investors are hungry not just for profits, but for growth. They tend to gauge success by monthly sales increases at stores open at least a year. And by that yardstick, Target is lagging.

For the first time in years, in fact, the chain that devotees refer to as Tar-zhay, because of its fashion flare, looks vulnerable. In November, sales at Target stores open a year rose 1.1 percent, when adjusted for a quirk in this year’s calendar. The company will provide a glimpse into sales so far this December in a conference call Monday.

Lazard Capital Markets predicts that Target’s average monthly sales growth for 2007 will be the lowest in four years. And that is raising broader questions about the American consumer: If the store that America’s middle class loves to love is experiencing turbulence, analysts say, it bodes poorly for all retailers.

There is some dispute about exactly what ails Target. Many analysts said consumers are cutting back on optional products, like a new bath mat, and spending their money on essentials, like cleaning supplies, which are less profitable for stores.

Adrianne Shapira, a retail analyst at Goldman Sachs, said that “in the past, what Target has done so well is capitalize on discretionary spending. Shoppers walked around the store and tossed a few things they did not need into the basket.” Now, she said, “that is falling by the wayside.”

Rosa Setkiewicz, 50, stopped at the Target in Jersey City, N.J., recently to stock up on Arm & Hammer baking soda, Clorox bleach and Downy laundry detergent — “things that are cheap,” she said as she loaded the trunk of her Toyota Corolla. “I have cut back a lot on clothing and things that are not necessary.”

Bill Dreher, an analyst at Deutsche Bank Securities, dubbed this phenomenon “trading down within the store.”

Target executives acknowledge there is some truth to the theory. But the bigger issue, in their view, is that the number of customers walking into Target’s stores has dropped. They see that as a sign not of any tactical failure on Target’s part, but of rising doubts among consumers about the economy.

Such rising doubts can have significant political implications. According to the notion of "pocketbook voting," economic conditions are the single best predictor of a president's job approval, and while President Bush is not on the ballot in 2008, his administration's economic legacy might be a significant factor determining the election-year results .

As Michael S. Lewis-Beck and Mary Stegmaier note in the abstract to their article, "Economic Determinants of Electoral Outcomes" :

Economic conditions shape election outcomes in the world's democracies. Good times keep parties in office, bad times cast them out. This proposition is robust, as the voluminous body of research reviewed here demonstrates. The strong findings at the macro level are founded on the economic voter, who holds the government responsible for economic performance, rewarding or punishing it at the ballot box. Although voters do not look exclusively at economic issues, they generally weigh those more heavily than any others, regardless of the democracy they vote in.

I'll be keeping my eye on economic developments in upcoming months.

The Democrats already have the edge in public opinion polls heading into 2008; and as I've noted before, economic concerns are becoming more important to voters.