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Post Holiday Gift Returns Could Deal Another Blow to Retailers

Amid a dismal holiday sales season, rife with low shopper traffic and huge markdowns, U.S. retailers might suffer another hit to bottom lines as stretched consumers take advantage of lenient return policies to trade in holiday gifts for cash.

The returns could subtract $47 billion, or 10 percent, from retailers’ projected $470 billion in holiday sales, estimate researchers for the National Retail Federation (NRF), a Washington, D.C.-based retail association. Last month the NRF issued a report citing retailers’ plans to be more lenient with their return policies for holiday purchases to enhance customer service. New policies included lengthening the amount of time an item is eligible for return or accepting merchandise returned without a receipt.

In addition, more shoppers in the survey said they planned to include gift receipts with presents than in past years. That seems to be coming to fruition already. The volume of returns in the first three days following Christmas was up 50 percent compared to the same period in 2007, says C. Britt Beemer, CEO of America’s Research Group, a Charleston, S.C.-based consumer behavior research firm.

“Imagine that a retailer sells a scarf to Aunt Lucy [during the holiday shopping season] and she pays $21 for that scarf, which had an original price of $60,” says Emanuel Weintraub, president of Emanuel Weintraub Associates, an Englewood Cliffs, N.J.-based retail consulting firm. “Aunt Lucy’s nephew, who never wore scarves, comes back to the store and says ‘I want cash.’ The retailer now has to enter that product into inventory and it’s worth less today than it was two weeks ago, because time is not a retailer’s friend. For a retailer, it potentially means millions of dollars coming back through their 50 or 100 or 200 stores.”

Weaker chains might not be able to afford lenient return policies because they already have too little cash on hand to satisfy their lenders, adds Weintraub. In fact, this holiday season will prove to be a make-or-break time for many U.S. retailers, according to Howard Davidowitz, chairman with Davidowitz & Associates, Inc., a New York City-based retail consulting and investment banking firm. Retail experts, including Davidowitz, expect a significant uptick in store closings and bankruptcies in the first quarter of 2009 as a number of chains will likely end the year in the red.

With retail sales already weak, both Beemer and Weintraub insist retailers have not significantly loosened their return policies; however, they do anticipate an uptick in the number of returns. But the electronics seller Best Buy, for example, announced in mid-December that it would continue to accept returns on purchases made between Nov. 1 and Dec. 24 until Jan.24. The store normally has a 30-day return policy. The Jan. 24 timeline does not cover digital cameras, camcorders, GPS devices, and laptop and desktop computers.

NRF did not return calls seeking comment. NRF’s Return Fraud Survey, released Nov. 13, found 52 percent of retailers planned to make it easier to return items this holiday season compared to their year-round policies. In 2007, only 35 percent of retailers NRF surveyed indicated they planned to do so.

The NRF 2008 Holiday Return Survey, conducted by BIGresearch, a Worthington, Ohio-based research firm, reported that 59.6 percent of shoppers said they now include a receipt with their gifts. Last year, the number was 57.5 percent. And gift recipients are more likely to return merchandise this year because they want to hoard as much cash as possible, says Beemer.

America’s Research Group estimates more than 29 percent of consumers will make merchandise returns this year, compared to the five-year average of approximately 20 percent. Apparel retailers will likely experience the greatest increase, since apparel accounts for a disproportionately large share of holiday gifts and is viewed as a non-necessity, says Craig Johnson, president of Customer Growth Partners LLC, a New Canaan, Conn.-based consulting firm. Clothing made up 12.7 percent of all planned gift purchases this year, according to an ICSC/Goldman Sachs Holiday Survey released in November. Gift cards came in second, at 12.5 percent, but people tend not to return gift cards because recipients can buy products they want or need, notes Johnson .

The anticipated rise in returns comes in the wake of an already weak holiday sales season. In November, the most recent month for which data is available, same-store sales in the U.S. retail sector fell 2.7 percent from the same month in 2007, according to ICSC. Total sales during November declined 0.7 percent, according to ShopperTrak, a Chicago-based research firm. Meanwhile, for the week ending Dec. 27 same-store sales fell 1.8 percent year-over-year, though total sales rose 21.2 percent. (For a complete weekly breakout of holiday sales, please see our Chart of the Week

For the entire 2008 holiday shopping season, Beemer predicts a same-store sales decline of 2.8 percent. Total sales, according to Johnson, will likely rise from 0.5 percent to 1.0 percent.

An uptick in returns will further shrink retailers’ profit margins for the fourth quarter of 2008, says Beemer. But, he adds, the impact might be minimal compared to the damage left by the 75 and 80 percent markdowns many chains have been forced to offer to move their remaining inventory.

“The returns will drag things down a little bit, but the major driver of the dismal holiday sales period will be the overall economy,” says Johnson. “Sales [numbers] may not be quite as disastrous, but profits are still going to be very difficult for many retailers.”

--Elaine Misonzhnik

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