It's not too early for oil to spoil holiday retail

By Brad Dorfman - Analysis

CHICAGO (Reuters) - It might only be the end of May, but soaring oil and gasoline prices mean retailers already need to be looking ahead to a less-than-cheery holiday season as they decide what to order for that key season.

In a study by retail consulting firm WSL Strategic Retail, 60 percent of U.S. consumers agreed with the statement: "I can't control gas prices, so I'm watching what I spend on little things."

That study was conducted back in November, when gasoline was averaging only about $3.11 a gallon and oil was trading at about $94 a barrel, a far cry from current prices of $3.79 and $132.

"That's when we thought it was bad. We didn't know what bad was," WSL president Candace Corlett said.

While many consumers are looking forward to summer after finally shutting down furnaces for the season, retailers do not get to bask in the sunshine.

U.S. retailers must decide soon what to stock for the make- or-break holiday season, a tricky proposition in the best of times, but fraught with peril now that the economy is shifting quickly and unpredictably.

Analysts say they should plan for the worst.

"It's going to be very muted," said Rosalind Wells, chief economist for the national Retail Federation. "Even if the economy does pick up a little, which we're forecasting in the second half, we're not looking for a strong rebound."

The 2007 holiday season was the worst since 2002, with sales up only 3 percent, according to the National Retail Federation. Following that holiday season, Sharper Image Corp (SHRPQ.PK) and Lilian Vernon Corp both filed for bankruptcy, with Linens 'n Things following suit later.

Some retailers are already planning for rough 2008 holiday season.

"It could be a very difficult holiday economically," said David Sternblitz, treasurer for jewelry retailer Zale Corp (ZLC.N).

WSL's Corlett agrees.

"Home heating oil and the gas prices together, you just can't run or hide from that," Corlett said. "And they are definitely going to overshadow all the purchase decisions around the holiday.

If 2008 proves to be as bad or worse as 2007, retailers will need to control inventory and costs to preserve profits.

"They can do okay if they plan correctly, if they are prudent in how they are buying, if there isn't too much inventory left on the shelves, because they won't have to do too much marking down," Wells said.

Corlett said relying only on cutting prices to drive traffic to stores will not be enough.

"I think shoppers are so immune to sales at this point," she said. "We're surrounded by sales always. Retailers have trained us to never shop full price."

Retailers instead will need to come up with fresh merchandise to attract customers who have bought all the cashmere sweaters, jeans and boots they want in the past several years.

"Retailers are really going to have to push back against stocking the floor with the same things that have been on the floors for the past five years," Corlett said.

She also agreed retailers need to keep inventory lean and said they could even try to use scarcity as a way to lure customers to stores by convincing those customers a product might be gone if they wait to long.

"If I were Macy's, I'd be thinking it's better to run out of something than to be overstocked in January," she added.

(Additional reporting by Aarthi Sivaraman; Editing by Andre Grenon)