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'Tis the season of jolly discounts
Stores will be cutting prices extra sharply this fall and winter after summer sales weakness.
September 28, 2004: 12:22 PM EDT
By Parija Bhatnagar, CNN/Money staff writer

NEW YORK (CNN/Money) - Winter shopping could become a bargain hunter's delight if stores do what industry experts expect them to do: more price-cutting during the holidays than usual.

What's known for sure is that the past three months have seen disappointing sales for many of the nation's biggest store chains.

Discounters Wal-Mart (WMT: Research, Estimates) and Target (TGT: Research, Estimates), the No. 1 and No. 2 discount chains, suffered a weak back-to-school season that provided little lift to sluggish summer sales.

It's been the same story with the nation's department store chains and mall-based specialty stores. Only a handful of luxury goods retailers and consumer electronics chains likeBest Buy (BBY: Research, Estimates) have dodged the retail downdraft.

"I think there will be heavy promotions over the holidays because retailers have not been meeting their sales plans," said Howard Davidowitz, a New York-based retail analyst and consultant.

How deep will it get?

"Some retailers are already marking up 40- to 50-percent off signs as we speak," Davidowitz said.

And it's not just on toys, typically the category that sees the most aggressive price wars.

"It will be on all types of products that draw the most traffic for Christmas shopping. We're talking about sweaters, footwear, jewelry, entertainment products like DVDs and CDs," he said.

Banking on the bargains

Consumers won't mind if merchants are indeed feeling some pre-holiday jitters.

Last year shoppers missed out on the big bargains and bought seasonal merchandise that was near full price because retailers kept a tight rein on inventories heading into the all-important fourth quarter, a period that can account for as much as 50 percent of sales and profits at many store chains.

"Lean inventories won't help retailers this year if they can't lure customers into their stores," Davidowitz said.

Neither will the lingering effects of higher gasoline prices.

"If the price of oil remains between $45 to $50 a barrel, that's not a good sign especially if we experience a very cold winter. Heating oil prices will go up and that's likely to dampen consumer spending during the winter months," said Ken Perkins, retail analyst with Boston-based research firm RetailMetrics.

In addition, most retailers don't have the momentum they had a year ago when tax rebate checks fueled fourth-quarter spending -- which means consumers may be more tight-fisted and retailers face tough comparisons with last year's numbers.

"On the economic front, there haven't been significant improvements in jobs and wage growth, and the comparable sales comparisons are only getting tougher," said Perkins. "It sounds reasonable to expect big discounts this year. The macro factors would suggest it."

Analysts said that while it's good for consumers, the price-cutting could make profit statements tough for retailers to read this year. Though first and second-quarter earnings have been strong, analysts have been ratcheting down estimates for the third quarter, according to Perkins.

According to RetailMetrics retail index, third-quarter earnings are expected to grow 11.7 percent, down from an earlier forecast of 14 percent for 140 retail companies that Perkins tracks.

"Fourth-quarter retail earnings are expected to grow 13.5 percent. That's below last year's growth and could come down further if we see plenty of promotions," Perkins said.

Trade group optimistic

For its part, the National Retail Federation (NRF), the industry's biggest trade group, is maintaining a positive outlook. The agency forecast holiday sales to grow 4.5 percent over last year to about $220 billion.

NRF spokesman Scott Krugman disagreed with suggestions that retailers will be forced to slash prices more than usual in coming months.

"Yes there will be sales, but these will be planned sales and not one where everybody blinks at once," said Krugman, referring to the holiday season in 2000 when retailers saddled with excess inventory were forced to cut prices by a whopping 60 to 70 percent.

"Inventories are still lean and we'll see item-specific sales similar to last year's level," Krugman said. "Also, there are two extra sales days during the holidays. That should help retailers."

J.C. Penney (JCP: Research, Estimates) spokesman Tim Lyons said the Plano, Texas, department store chain isn't anticipating deeper promotions versus last year but added that "it's still too early to tell."

"Our inventory is in good shape and we're not in a situation where we're carrying more goods than we planned for," Lyons said. "But that said, we still have plenty of stuff going into the holidays and we will have to sell it."

Wal-Mart (WMT: Research, Estimates) could not be reached for comment.

But Wal-Mart CEO Lee Scott told an industry gathering recently that he believed the world's biggest retailer is in good shape for the Yuletide season despite its poor summer performance.

"Will August translate into a difficult Christmas? We don't think so. I believe it will be what we have planned for. We have a good assortment and are well-priced for the fall," said Scott, who spoke to an industry gathering at a Goldman Sachs retail conference in New York this month.  Top of page

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