Retail roundtable: The Grinch who stole retail sales (Part 1 of 3)

Jennifer Schonberger | Oct 15, 2008 1:05pm EDT | Comment

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Halloween hasn’t arrived yet and already retailers are spooked by what the upcoming holiday season will bring.

As the credit crunch has deepened to give way to a financial crisis, consumers are confronted with a myriad of economic hardships, including rising unemployment, elevated energy prices and tighter credit. With consumers tightening their spending habits, retailers are expected to face one of the most grim holiday seasons in years.

Today’s retail sales report serves as a precursor to what the holiday season may bring. Retail sales for the month of September plunged nearly double what economists projected, marking the largest decline since August 2005 as consumers reined in spending.

To see how lackluster this holiday sales season will be, as well as to get a look into retailers’ strategies and overarching trends this holiday season, SmallCapInvestor.com interviewed six retail experts. Our panel of experts includes Mercedes Gonzalez, CEO of Global Purchasing Group; Peter Collins, chief financial officer of True Religion Apparel, Inc.; Jim Reed, lead portfolio manager for the UMB Scout Stock Fund; Jeff Van Sinderen, senior equity analyst at B. Riley & Co.; Eric Beder, senior retail analyst at Brean Murray, Carret & Co.; and Wendy Liebmann, founder and president of WSL Strategic Retail.

According to our panel, this slowdown will be broad-based, from low-end to luxury. Retailers will focus on discounts and tighter inventory management to move merchandise and shore up bottom-lines. Those that offer value and unique items will weather this holiday best. Discounters will be the sweet spot.

Here’s what our experts had to say:

What is your sales outlook for the holiday shopping season? Will we see a repeat of last year or will things be worse and why?

Reed: “It will be worse than it was last year. We’re expecting essentially a 1% increase versus a 3% increase last year. We’re taking our lead from the back-to-school sales, which were kind of punk due to high gasoline prices, which remain high and are still taking a bite out of customers — although it’s not extreme as it once was. Then there are job losses. The September jobs report saw 40,000 jobs lost in retail alone and that’s unusual. Usually they’re not cutting jobs at this point in the season. Another area that hasn’t been focused on too much is heating costs for the winter. If we have a cold snap — especially in the Northeast — higher heating oil costs will dig into people’s pockets. Finally I think it’s just general economic fear. People are going to be bargain-hunting and watching their pennies.”

Collins: “For True Religion we’ve seen a trend where the premium denim category is doing well in the market and we expect that trend would continue. In general I think that premium denim is one category that is growing in 2008 as opposed to prior years, so others who aren’t as focused on premium denim are having more of a challenge than we are.”

Van Sinderen: “Holiday sales were disappointing last year and this year will be be incrementally worse. I think it’s going to be the worst holiday season in my career, which goes back to around 1991. It will be a continuation of the consumer gravitating toward markdowns and value. Items on deep discount will attract consumers. The consumer slowdown is being seen across the board. It’s at the low end through luxury. That’s what we’ve seen so far this fall and I think it will continue into the holidays.”

Gonzalez: “I can only speak for the downturns in the last 18 years, and it's grim. Department stores and now specialty chains are becoming very product development oriented. They're re-cutting things that have done well for them. Back-to-school was dreadfully boring. There wasn't any excitement in retail. We're going to see a lot of panicky retailers who will drop prices very early in the season. Also, traditionally in an election year, business gets a little crazy right before the election. People stop shopping; I guess they must have amnesia, and not remember what happened four years ago, eight years ago, sixteen years ago.

“The good news is that even though Wall Street is crashing, everybody is freaking out and unemployment is soaring, specialty stores are actually doing well. We're finding that people are still shopping, but they want something that's different.”

Liebmann: “They will be worse. Last year was relatively soft and there’s certainly nothing that would indicate it will be better than that. With all the economic issues weighing on the American shopper, they are really going to pull back at this point. While the holiday has a set date to it, people no longer actually feel the obligation to do all their Christmas shopping before Christmas.”

Beder: “In the market we’ve gone from euphoria to depression in terms of retail sales. I don’t think Christmas is going to be the worst in the last 20 years, but it’s going to be very weak, with low single-digit growth. We’ve assumed in our universe that same-store sales will be negative for the holiday season. However, the consumer is still going to spend money for different or unique products. There will be spending. The Grinch isn’t going to steal all of Christmas.”

What are retailers’ strategies for generating sales this holiday?

Reed: “Christmas in August or Christmas in October. It’s an earlier Christmas and a more promotional one. We’re already seeing Christmas mailers now. It used to be that Halloween was its own seasonal shopping experience. I think it’s going to get skipped this year for Christmas.”

Collins: “We think it’s very important that we evolve our product and innovate, and we have merchandise that is fresh and compelling for the consumer.”

Van Sinderen: “There will be a lot of promotions, door busters and giveaways to get people into the stores to buy. Companies are also trying to do sales earlier in the season. The retailers that do this will get the traffic. The ones that sell at full price will struggle — unless they’re selling items that are absolute must-have items. Part of the problem is that there aren’t a lot of must-have items, nor is there a large enough shift in fashion trends, especially in apparel, to generally drive sales.”

Gonzalez: “It's going to be a price war. Retailers are thinking, ‘Go deep into things where you can build margin, go deep into private label, look at what we did well with six months or a year ago, and then just overbuild on that,’ and I think that's the wrong approach.

“The consumer is demanding something different and the department stores are not fulfilling that. Department stores are still not testing new products. We are buyers for specialty stores and when we talk to other designers, they still cannot get a department store buyer or a national buyer to pick up the phone and hear them out when it comes to a new line. You would think that by now the hammers have hit them on the head and they've woken up and said, ‘We need to try something new,’ but we're not seeing them capture that.”

Liebmann: “Retailers will be aggressive on the sales front early because they’re not quite sure how people will feel another month from now. They figure if they can get people to buy a little bit at a time than that’s better than expecting them to buy one big thing. Retailers have already been circumspect about new inventory management, so I think they’ve done all they can do on that front. If they’re really smart, they’ll give the American shopper a sense that they feel their pain, which people would like recognition for.”

Beder: “The strategy is very defensive. It’s cutting back on inventories, trying to hold back on discounting and not rolling out a lot of stores. Right now the retail world is basically reacting to the short term, and these are the types of actions you can take when you realize the top-line is going to slow down. The mantra for all retailers right now is focusing on operational issues and cutting back on discounting.”

Is selling the cutting edge trend the tactic to take for sales generation, or is back to basics a safer bet, as inventory that doesn’t sell this season could sell the following season?

Reed: “It’s more a matter of your value proposition. You want a company who operates under a price umbrella for people who are going to have a tougher time. You’ve got to get the fashion right. But retail is fickle, so you have to keep your eye on the concept you’re dealing with and their execution.”

Van Sinderen: “The issue with basics is that everyone is going to have basics, as it’s generally the default; then the only way you can differentiate is by price. If you try to default back to basics you run the risk of having to take many markdowns because everyone is trying to play it safe. [Retailers] have to have some basics, but it’s not a cure for what’s going on in the industry.”

Gonzalez: “Employing basics as a safer bet is just going to backfire and it won’t happen slowly. It's going to crash and burn.”

Liebmann: “They need to do both. They need to understand that people are focused on what they need, rather than what they want. But it is a balance between having what the customer needs at the moment, and having something that’s nicer that people can aspire toward that makes them dig deeper into their pocket, or credit card.”

Beder: “Basics don’t work. The customer doesn’t need any more basics. They are not paying up for basics. We’ve seen weakness in players like J. Crew and others that are focused on basics. People want to get something unique; basics are not going to drive the market.”

Read part 2 of our 3-part series.