Holiday retail: Bah, Humbug! survey finds that lackluster merchandise, wary consumers could drag down critical year-end shopping season.

By Parija B. Kavilanz, senior writer

NEW YORK ( -- As shoppers get ready to start the annual frenzy over holiday shopping, retailers are strapping in for what is likely to be a bumpy ride.

A field of retail experts surveyed by said they expect sales to increase between 2 and 5 percent - with most predicting numbers in the low end of that range.

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Last year, national retail sales in November and December rose 4.6 percent over the same period a year earlier.

"This holiday season is going to be terrible," said Howard Davidowitz, chairman of retail consulting and investment banking firm Davidowitz & Associates. He thinks holiday sales will rise a mere 2 percent over last year.

"The economy is moderating. Consumers have never been in more debt," Davidowitz said. "They've made up for their negative savings by using their homes as a piggy bank, which they can't do anymore."

A lot is at stake for the nation's retailers, who typically make 50 percent of their annual sales and profits in November and December alone.

The year-end spending spree is also vital to the economy, because consumer spending fuels two-thirds of the nation's economy.

The National Retail Federation, citing the negative effects of the housing slump and mortgage crisis on low-to-middle-income Americans, said sales will increase 4 percent to $474.5 billion, or at their slowest pace in 5 years.

Sure enough, merchants who cater to those households are feeling nervous. This week, Wal-Mart (Charts, Fortune 500), the world's largest retailer, already chopped prices on holiday toys by as much as 50 percent. Wal-Mart said it will slash prices weekly until Christmas.

Other analysts predict an even more dire outcome by January.

Britt Beemer, chairman of America's Research Group, also pegs this year's holiday sales increase at a mere 2.2 percent.

"Consumer debt is bearing down on 70 percent of Americans," Beemer said, citing a survey of 1,000 households conducted in September.

Consumers will be more bargain-driven than ever this year "because that's the only way that they can afford to buy things," he said. "The lack of spending power will have a huge impact on holiday sales," he predicted.

What's more, retailers will have a harder time attracting consumers to their stores, according to ShopperTrak RCT. Data from the Chicago-based market research firm show that visits to malls nationwide have declined seven out of the past eight months.

Americans are making fewer trips to stores as gas prices have risen. They are also making more online purchases and bulk-buys at wholesale clubs, such as Costco (Charts, Fortune 500) and Sam's Club.

"It's the first time that we've seen traffic fall across the United States, and we're alarmed by this continuous drop," said Bill Martin, CEO of ShopperTrak, which monitors traffic and sales at 50,000 retail locations.

Must-have items

Analyst Marshal Cohen of NPD Group says the lack of must-have products - an important driver of gift buying - is dampening forecasts.

"There's nothing out there yet that consumers have to have, other than the iPhone." Cohen said. "And retailers aren't doing anything to fix the merchandise mix. They're only cutting prices."

Cohen expects holiday sales to grow between 3.3 and 3.5 percent, he said.

"The good news is that consumers are still showing an ability to spend," Cohen said. "But the problem is that [consumers] will become very lackadaisical when they are not excited."

Cohen expects a spike in the sale of gift cards, which are a convenient way out for shoppers frustrated by a lack of hot items.

"There's good news, bad news here," he said. "Fifty percent of Americans say they now think it's acceptable to give a gift card. It's a great gift, but it doesn't promote an impulse purchase on the part of the gift buyer," Cohen said.

Impulse purchases - the me-too gifts - account for about 25 percent of holiday sales, Cohen said. "This year, it will be lower than that."

But not everyone has written off Holiday 2007.

Deloitte Research economist Carl Steidtmann forecasts a 4.5 to 5 percent increase in sales between November and January.

Retail sales, particularly of high-end items, have held up well year to date. That's a good sign for holiday spending, he said. Moreover, still steady jobs and income growth is helping to prop spending.

"Christmas and the holidays are an American tradition that consumers seem determined to live up to," he said.

Winners and losers

Frank Badillo, senior economist at consulting firm Retail Forward, is betting that there will be plenty of retail losers this holiday season.

He anticipates that clothing and accessories stores will register only a 2.5 percent sales increase, compared to 6.5 percent last year.

"The biggest let-up will be in shoe purchases," Badillo said.

He estimates that department store sales will grow 2 percent, compared to 4.5 percent last year. Luxury sellers, such as Nordstrom (Charts, Fortune 500) and Saks, will be the biggest drivers, he added.

Purchases at home improvement chains, such as Home Depot (Charts, Fortune 500) and Lowe's (Charts, Fortune 500), should equal last year's 2.2 percent gain, Badillo said.

Furniture sales, which rose 3.7 percent last year, will suffer a 1 percent decline over the holiday period, he said.

Retail Forward anticipates that the sale of consumer electronics goods, which surged 7.1 percent last year, will grow only 1.5 percent. Electronics sellers, such as Best Buy (Charts, Fortune 500) and Circuit City (Charts, Fortune 500), are facing very difficult sales comparisons from last year, Badillo said.

"Retailers will set steeper price cuts on some hot products, but consumers will have less enthusiastic reaction to the discounts versus last year," said Retail Forward consultant Ayuna Kidder.

This year's winners will include discounters like Wal-Mart and Target (Charts, Fortune 500) supercenters and wholesale sellers like Costco, because of their one-stop shopping convenience and price competitiveness, Kidder said.

She forecasts an 8 percent increase in supercenter sales over the holidays. Internet retailers will also do well, Kidder said. Sales are expected to jump 18.5 percent, slightly slower than the 24.3 percent increase during the 2006 holiday period.

"This is the best-performing category, but there's a slight letup because of the overall retail sales slowdown this year," she said. Top of page