Retailers face worst holiday in years

By Nicole Maestri - Analysis

NEW YORK (Reuters) - Not ho-ho, maybe not even ho-hum. Horrible?

The impending U.S. holiday shopping season is expected to be a weak one, but the debate is coming down to whether it could go down as one of the worst on record, as U.S. consumers show an increasing reluctance to spend.

In the past year, consumers have been battered by the housing market downturn, surging food and fuel costs, a credit crunch, and a weakening job market.

On Monday, Wall Street had its worst day since markets reopened after the September 11 attacks in 2001, as Lehman Brothers Holdings Inc LEH.P filed for bankruptcy and insurer American International Group Inc (AIG.N) struggled for survival.

The uncertain environment has caused consumers to do what is most frightening to retailers -- cut consumption.

Purchases of home decor, flashy jewelry, trendy handbags and nice-to-have clothing have gone out the window in favor of food, toiletries and hot electronics.

All of these trends point to a grim holiday period, which can account for 25 percent to 40 percent of a retailer's annual revenue.

"Retailers are essentially bracing for a disappointing holiday season," said Sung Won Sohn, an economics professor at California State University and a vice chairman at teen retailer Forever 21.

Touting low prices or offering heavy promotions will be crucial to winning sales.

"That's just about the only way you are going to be able to move your merchandise," he said. "Consumers are not going to walk in voluntarily to buy full-priced merchandise."

GRIM OR GRIMMER?

While the Thanksgiving weekend, which marks the start of the holiday shopping rush, is more than two months away, estimates for holiday sales are already trickling in.

Deloitte forecast holiday retail sales will rise 2.5 percent to 3 percent during the November to January period, less than last year's 3.4 percent increase and potentially one of the smallest gains since a 2 percent rise in the holiday season of 1991, when the nation had recently emerged from a recession.

Telsey Advisory Group currently expects holiday sales, or sales in November and December, to be flat to up 2 percent.

"We think it's going to be a tough holiday, probably one of the toughest since 2002," said Telsey analyst Joseph Feldman.