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Good Tidings...Or Not: Katrina, rising gas prices expected to spoil the holiday spirit

The Grinch that could steal Christmas for retailers this year will be higher energy prices. With more than three months until the end of the holiday season, the National Retail Federation predicted today that holiday sales will increase 5 percent, less than last year's 6.7 percent gain. While numbers may vary, the sentiment among analysts remains the same. Holiday sales this year won't be nearly as high as 2004 largely due to rising energy costs.

"I think gas prices will have more of an effect this year," says Pam Goodfellow, an analyst for BIGresearch, a Columbus, Ohio, consumer research firm. "They are at the highest levels they have ever been," says Goodfellow. "When gas prices hit $3 a gallon again, it might make people think more about where they are driving."

One analyst, Britt Beemer, president of America's Research Group, says he thinks holiday sales could be negative this year; the first time in 20 years. Beemer says historically Labor Day sales, which were down about 6 percent this year, have been a good bellweather for the holiday season.

In addition, Hurricane Rita, which has just been upgraded to a Category 4 storm with 140 mph winds, could deal a second blow to the nation's energy infrastructure in the Gulf of Mexico later this week. "If the hurricane sends gas prices over $3 again, that could send the customer into shock," says Beemer.

Even less pessimistic forecasts show that customers are being a little tighter with their budgets this year. BIGresearch estimates that about 34.7 percent of consumers plan to spend less on gifts this year than they did last year because higher gas prices, compared with 27.9 percent in 2004. The average retail price for regular gasoline was $2.95 last week, an increase of $1.10 since last year, according to the U.S. Department of Energy.

Despite higher gas prices, retail sales have increased about 6 to 7 percent so far this year, largely driven by affluent customers, says Jay McIntosh, director of retail and consumer products for Ernst & Young. However, other factors, such as Hurricane Katrina, may hurt holiday shopping. "Some people may feel it's wrong to spend frivolously," says McIntosh.

To increase sales, retailers, especially low-end chains such as Wal-Mart, are expected to have sales early this season. "Promotional shopping will entice more shoppers into the store," says Goodfellow. "Consumers are still very conscious about where there money is going."

While early bargains may increase store traffic, they could also eat away at retailer's margins. That could be especially acute this season as retailers deal with rising distribution costs caused by energy prices and Hurricane Katrina. "I think it could be a good season for sales, but a challenging season for profitability," says McIntosh. --David Koch

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