Retail Traffic

Inventory Controls Signal Holiday Pessimism

Want a clue as to the holiday season may turn out? Look at inventory management.

After a slow fall, retailers report that excess inventory still needs to be moved, and, as a result, they have cut back their holiday orders. They don't want a repeat of last year, when retailers got stuck with big inventories and cut prices too late.

"I think that their inventories are probably going to be a little more in shape compared to last year, and a little lower levels," Simon Property Group CFO Steve Sterrett said in a conference call with investors and analysts Friday.

Pat Conroy, vice chairman and national managing principal of Deloitte Consulting's consumer business practice, agrees. "Retailers are clearly evaluating inventory levels, making sure they have the right assortments and merchandise strategy," he says.

Retailers used markdowns to move inventory in October, helping them to a 4.4 percent year-on-year gain in same-store sales, according to the International Council of Shopping Centers. It was the best month for retailers since June. But they still have leftover inventory. So the holiday season, which is just a little more than two weeks away, will begin with more markdowns and with retailers at the ready to cut prices.

Some discounters have already reduced toy prices. Wal-Mart was criticized last year for not being more aggressive in moving excess inventory and seems determined to not make the same mistake. So, for example, it cut prices on talking Furby dolls, which are expected to be one of the season's top sellers -- by $10, down to $39.88 each. Target Inc.'s policy has been to match Wal-Mart's prices, so it quickly followed suit on slashing toy prices. Kohl's Department Stores, too, has already cut prices on toys as well as Christmas decorations and apparel.

Other factors could hurt holiday sales, says Conroy. More than ever, consumers will be pressed for time and (with high gas prices) will be more efficient, minimizing shopping trips.

"You have to have what they want, but there also has to be convenience in buying, which means more registers and longer store hours," Conroy says. "And you better make sure when you get the consumer in the store, that you convert them, because they won't be coming back for a second trip."

The overall prognosis is not good. Volatility in gas prices, the continuing Iraq war, threats of inflation and the devastating series of hurricanes all have taken a toll on consumer confidence, which now sits at a two-year low, according to the Consumer Conference Board.

A recent survey completed by Leo J. Shapiro & Associates showed that a record high 54 percent of respondents will spend less on holiday shopping this year, and also that they will make fewer trips. Only 15 percent of households expect to increase spending. (Last year, 40 percent expected to spend less and 20 percent anticipated spending more.)

Respondents said they were stretched for several reasons. More than one-quarter said their family income had decreased in September and October (up from 18 percent in 2004). Nearly 70 percent said they had not been able to save money (up from 58 percent). More than one-third were facing financial pressure because of Hurricane Katrina with a similar number saying it was harder to get by now than a year ago. Lastly, 52 percent (vs. 38 percent the previous year) said they were in worse financial shape than a year ago.

These analyses, and others, contrasts with rosy industry projections by industry associations. Britt Beemer, president of America's Research Group, for example, is among those painting a grimmer picture. Beemer has said he thinks sales could decline for the first time in more than 20 years.

-- David Bodamer

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