September 3, 2010 / 6:58 PM / in 8 years

Analysis: As school starts, retail thoughts turn to holidays

CHICAGO (Reuters) - The state of the U.S. economy and consumer spending is bringing out the child in retailers: Now that school has started, they cannot wait until Christmas.

Unfortunately, the months in between are likely to be sluggish, as consumers more than ever are requiring big events like back-to-school sales and the holiday gift season to get them into stores.

Retailers reported stronger-than-expected sales in August, as discounts and warm weather helped entice consumers during the back-to-school season.

But that selling season will wind down in the next couple of weeks, and shoppers are likely to disappear again until Black Friday, the day after Thanksgiving, which traditionally starts off holiday buying.

“If you go back to early spring, what you see is shoppers saved up (for) back-to-school,” Wall Street Strategies analyst Brian Sozzi said. “What you might see now is, September and October, they save up again.”

The U.S. economy is showing some signs of life, but in fits and starts. On Friday, the Labor Department said U.S. employment fell less than expected in August. But the unemployment rate still edged up to 9.6 percent and another report showed that the dominant services sector grew less than expected.

(For a historic look at unemployment and holiday sales, see link.reuters.com/wew39n)

That type of data leaves consumers reluctant to let loose, which means that holiday sales could be hard-pressed to match the rebound seen in 2009.

“That pervasive, long-term, stubbornly high unemployment and underemployment is a real damper on consumer spending,” said Mark Cole, chief operating officer of CredAbility, a nonprofit credit counseling agency in Atlanta. “Any hopes of a consumer-spending driven recovery are very limited until the broader employment picture improves.”

“Caution” will be the watchword for retailers this holiday season, whether it comes to ordering inventory or hiring employees, analysts said.

“Retailers are going to be extremely cautious. They’ll almost be monitoring week-by-week, so you’ll see a lot more part-time hiring and a lot more agility in order to adjust to how quickly consumer sentiment can change,” said Jeff Joerres, chief executive of global employment services company Manpower Inc,(MAN.N).

Strong demand is not likely to kick in until late in December as consumers wait until the last minute to spend, making for another nerve-racking holiday season for retailers and their investors.

“You are going to see a lot of purchases being made during the last week before Christmas,” Sherif Mityas, a partner in the retail practice at A.T. Kearney.

UNDECKING THE SHELVES

The stronger-than-expected sales in August helped retailers clear through inventory that spiked higher in the second quarter and helped ease fears that retailers will need to resort to drastic discounts to clear store shelves.

Many specialty apparel retailers have learned to keep inventories lean since margins got clobbered when sales dove in 2008, Mityas said.

“They are going to surprise some folks in terms of their ability to hold onto some of their margin through the holidays, even in a depressed growth state,” he said. Teen clothing retailer American Eagle Outfitters Inc (AEO.N) and Victoria’s Secret parent Limited Brands Inc LTD.N are two retailers that could positively surprise investors during the holidays, he said.

Abercrombie & Fitch Co (ANF.N) is another retailer that could do well during the holidays, especially after posting double-digit same-store sales declines in November and December of 2009, Sozzi said.

The company has moved away from a historic stance of shunning discounts, helping it attract shoppers who frequented price-cutting competitors in the past.

“Yes, they are lowering price, but the key thing is they are making up enough volume to offset the price cuts,” Sozzi said.

He also named discounter Target Corp (TGT.N) as a candidate to do well during the holidays, noting that it has improved its electronics, beauty and healthcare sections.

With consumers looking to save money, dollar store operators like Family Dollar Stores Inc FDO.N and Dollar General (DG.N) could also be among the winners, Mityas said.

But just having low prices is not necessarily enough and discount leader Wal-Mart Stores Inc (WMT.N) is going to be pressed to show it has the right merchandise to bring consumers back after seeing same-store sales fall for five consecutive quarters.

“I don’t know how they (will) do during the holidays,” Sozzi said. “Their assortment is not all that compelling.”

Additional reporting by Ben Klayman in Detroit and Phil Wahba, Helen Chernikoff and Nick Zieminski in New York; Editing by Steve Orlofsky

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