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(Reuters) - The 2012 holiday season may have been the worst for retailers since the 2008 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 Inc.
Shares of retailers dropped sharply on Wednesday, helping drag broader indexes lower, as investors realized they were likely to be disappointed when companies start to report results in a few weeks' time.
"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.
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 latest sign of trouble came from MasterCard Advisors Spending Pulse, which reported holiday-related sales rose 0.7 percent from October 28 through December 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 profit.
"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 4.1 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 closed down 1.7 percent, and 14 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 calculating 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.
The day after Christmas, retailers were using deep discounts to lure shoppers. 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 Macy's Inc's Bloomingdale's promoted discounts of up to 75 percent in some cases.
At a Target store in New York City's Harlem neighborhood, most shoppers seemed to be spending more on groceries, toys and small gifts than on gadgets or clothes.
Despite discounts of 50 percent, there were few takers for Jason Wu glass ornaments, Oscar de la Renta canvas totes and other designer goods launched under the mass merchant's tie-up with upscale chain Neiman Marcus.
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.
This week's cold, snowy weather on the heels of a warm start to December could spur people to use the gift cards they received or their remaining discretionary income to buy everything from jackets to snow blowers, said Evan Gold, senior vice president of client services at Planalytics, which tracks weather for businesses including retailers.
In December, he said, "people are out spending anyway, weather can trigger what you purchase, not if you purchase, but what you purchase."
A variety of factors were thought to be at fault for the weak season, starting with Superstorm Sandy, which depressed sales in the U.S. 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 the Gap, 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 that 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.
Wal-Mart shares ended down 0.8 percent at $67.99 on Wednesday, while Macy's shares were down 1.1 percent at $37.11, Barnes & Noble shares were down 3.5 percent at $14.49, Amazon.com Inc shares ended 3.9 percent lower at $248.63, and Ann Inc shares lost 5.1 percent to close at $32.06.
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 and Matthew Lewis