(Corrects spelling of analyst's name in paragraph 15 to Marshal Cohen, not Marshall Cohen)
* MasterCard SpendingPulse sees growth under 1 pct
* Retail stocks sink in Wednesday trade
* Analysts warn of deep discounts to cut inventory
By Nivedita Bhattacharjee and Jessica Wohl
Dec 26 (Reuters) - The 2012 holiday season may have been the worst for retailers since the financial crisis, with sales growth far below expectations, forcing many to offer massive post-Christmas discounts in hopes of shedding excess inventory.
While chains like Wal-Mart Stores Inc and Gap Inc are thought to have done well, analysts expect much less from the likes of book seller Barnes & Noble Inc and department store chain J. C. Penney Co.
Growth was always expected to slow this season, though an improving employment picture and rising home values had helped mitigate the worst fears. But then Superstorm Sandy hit the East Coast in late October, mild weather blunted sales of winter clothing and rising concern about the "fiscal cliff" became more of a reality, dragging down already pessimistic forecasts.
"The broad brush was Christmas wasn't all that merry for retailers, and you have to ask what those margins look like if the top line didn't meet their expectations," said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group.
The latest sign of trouble came from MasterCard Advisors Spending Pulse, which reported holiday-related sales rose 0.7 percent from Oct. 28 through Dec. 24, compared with a 2 percent increase last year.
The preliminary estimate from SpendingPulse was in line with other estimates showing weak growth during the holiday season, when retailers can book about 30 percent of annual sales -- and in many cases, half of their profits.
"It has been a very uneven industry performance, probably at least for the last year, and that certainly continued into the holiday season," said Michael Niemira, chief economist at the International Council of Shopping Centers, in an interview with Reuters Insider.
The latest holiday season could end up the weakest since 2008, during the last recession, when sales actually declined. The National Retail Federation had previously predicted 4.l percent sales growth this year, versus a 5.6 percent increase a year earlier.
Markets reacted sharply to the gloomy outlook.
The S&P retail index fell 1.8 percent in midday trading Wednesday, and 16 of the top 20 decliners in the broader S&P 500 were retailers or consumer brands.
To be sure, the actual percentage change in holiday sales can differ substantially, depending on which group is composing the figure. SpendingPulse and the National Retail Federation, for example, look at different categories, which can cause some variation in their forecasts.
Regardless of how bad the figure is, one concern for retailers is that soft sales will mean an excess of inventory that will force some to slash prices.
Among other brands, Barnes & Noble offered 50 percent discounts in stores via email promotions on Wednesday, while Ann Inc had half-off at its Loft stores, and Bloomingdale's promoted discounts of up to 75 percent in some cases.
Even in a good year, retailers would have offered discounts to lure customers, but some suggest a weak year has now forced their hands.
"Retailers are no longer chasing sales, they are chasing inventory management. That means the discounts that they would have liked to be at 50-60 (percent) off have climbed to 75 to even 80 (percent) off," said Marshal Cohen, chief industry analyst at The NPD Group.
Erica Ayala, 31, a mother of four who lives in New York's Harlem neighborhood, waited until the day after Christmas to shop for that very reason, saving more than $150 on kids' clothes alone at Gap's Old Navy chain.
"You can't go wrong with that," she said.
SANDY AND CLIFF
A variety of factors were thought to be at fault for the weak season, starting with Superstorm Sandy, which depressed sales in the Northeast in late October and early November.
Sales recovered in the second part of November, with early hours and promotions helping drive traffic during the "Black Friday" weekend after Thanksgiving, analysts said.
But there was a deep lull in early December as a winter storm in parts of the United States may have limited sales, said Michael McNamara, vice president of research and analysis at MasterCard SpendingPulse.
On top of that, there were fears that taxes will rise in the new year if Washington cannot negotiate a solution to the end-of-year "fiscal cliff" dilemma.
A recent Ipsos poll for Reuters found that only 17 percent of shoppers were spending less due to cliff fears, though analysts said the damage was still done.
"The government usually does not have a role in holidays but this year they did. They got right in the midst of it, the timing couldn't have been any worse," NPD's Cohen said.
One bright spot has been online sales, which continue to grow at a faster pace.
On Christmas Day, online sales jumped 22.4 percent, outpacing the 16.4 percent increase in 2011, according to IBM Digital Analytics Benchmark, which tracks more than 1 million e-commerce transactions a day from 500 U.S. retailers.
Whether online or off, some of the winning retailers were expected to be Wal-Mart, which attracted shoppers with early deals on the night of Thanksgiving and kept its focus on value, and apparel chains like Gap Inc, whose bright sweaters were successful, according to analysts.
Toys sold well, and hot items that were harder to find later in the season included certain Mattel Inc Barbie dolls and LeapFrog Enterprises Inc's LeapPad2 tablet computer, according to B. Riley Caris analyst Linda Bolton Weiser.
For retailers who have struggled, analysts said all hope was not lost. Many have fiscal quarters that end in January, so they still have time to benefit from a post-Christmas rebound. Because Christmas fell on a Tuesday, some said they could even see a boost this week from people who have extra time off.
"There's still a little bit more time to go until the holiday season is officially over," Morningstar analyst Peter Wahlstrom said. (Reporting by Brad Dorfman, Nivedita Bhattacharjee and Jessica Wohl in Chicago, Additional reporting by Chuck Mikolajczak and Dhanya Skariachan in New York; Writing by Ben Berkowitz; Editing by Jeffrey Benkoe)