Sunday, Dec. 21, 2008

Stores eager to clear out inventory as season wanes

Retailers across the nation hope that many people share the view of one Christmas shopper in Modesto on Friday.

"We'll spend the same amount (as past years), because if everyone stopped spending, it would be a self-fulfilling prophecy," said Pat O'Brien of Boston, shopping at Ragamuffin, a children's clothing store in McHenry Village, with his wife, former Modestan Katy Hart O'Brien, and their two daughters.

Ragamuffin, a small, independent store, is doing fairly well thanks to loyal customers, co-owner Maggie Zeff said.

"It's a little bit slower than years past, but it hasn't been terrible at all," she said.

But retail experts say the sector overall is struggling this Christmas season, and the outlook for 2009 appears even worse.

Many stores are accelerating their use of survival tactics -- slashing prices further and pulling merchandise off shelves to send to liquidators -- as the number of holiday shopping days dwindles.

January and beyond look scarier for even relatively healthy merchants as the passing of the holidays gives shoppers no reason to spend.

What's worse, the industry expects a rise in returns after the holidays, with shoppers seeking to convert their unwanted gifts to much-needed cash as they struggle with rising layoffs, tightening credit and shrinking retirement funds.

Many retailers are in panic mode as they try to liquidate inventory in a season that's expected to show the first drop in sales in nearly 40 years.

Over the last weekend before Christmas, Sears stores are offering as much as 70 percent off fine jewelry and as much as 60 percent off outerwear. Macy's is dangling early morning discounts of as much as 75 percent. J.C. Penney is featuring 300 early morning specials on items from pajamas to handbags.

"The retailers are doing everything possible to be lean and clean by the end of Christmas, because the shoppers are not going to be there" in January, said New York-based retail consultant Walter Loeb. "This is more about survival."

The Northern San Joaquin Valley has been hit especially hard in the economic downturn because of foreclosures and other fallout from the housing market collapse.

Agriculture and related fields have been relatively strong, but even they can be hit by the economy's troubles. Roberts Ferry Nut Co., which sells almonds and other items in Christmas gift packages, has seen a roughly 15 percent drop, co-owner Dan Mallory said.

"I just don't think the consumer has the same buying power as before," he said.

Mallory, who sells online and at a store east of Waterford, said the cutback is by individuals as well as companies that buy his gift packages.

Adopting a defensive stance

The casualties from the holidays are rising. Circuit City Stores Inc. and KB Toys Inc. have filed for Chapter 11 bankruptcy protection in recent weeks. Mervyn's is going out of business at the end of the year, though Kohl's is acquiring its Merced store.

Even fairly healthy companies are making big shifts in their plans to respond to the deteriorating climate. Best Buy Co. Inc. announced Tuesday that it would slash capital expenditures by half in 2009 and would offer voluntary severance packages to virtually all its 4,000 corporate employees. The nation's largest consumer electronics chain said profits in the third quarter skidded 77 percent.

"We believe that the environment for consumer spending is likely to get worse before it gets better," said Brad Anderson, chief executive of Best Buy. It has seen little benefit from the bankruptcy of Circuit City, its largest rival, which is closing more than 150 of its approximately 700 U.S. stores by Dec. 31, including the Merced store.

Children's clothing chain Gymboree Corp. is cutting salaries by as much as 10 percent for senior management and corporate staff to prepare for what it believes will be a deepening spending slump. It expects that earnings for 2009 will be less than the current fiscal year.

"Consumer demand is much less than most of us understood even in September," said Richard D. Hastings, a strategist with Global Hunter Securities. He expects total retail sales will fall as much as 8 percent for the November- January period. Even with recent moves to cut inventory and slow store expansion, he said retailers are finding that their assets -- stores and inventory -- are "out of whack."

Hastings doesn't think the spending malaise will hit bottom until the second half of 2010 as mounting layoffs depress sales even further next year.

Michael P. Niemira, chief economist at the International Council of Shopping Centers, expects same-store sales will fall as much as 1 percent for the November and December period, but fears the decline could be even steeper. Same-store sales are sales at stores open at least a year and are a key indicator of a retailer's health. That would be the worst performance for the holidays since at least 1969, when the index began, Niemira said.

The only holiday period that came even close was 2002, which posted a meager 0.5 percent same-store sales gain.

He and Hastings declined to offer sales forecasts for next year, given so much economic uncertainty.

"It's just not clear where the bottom is," Niemira said. "It depends on when we get our hands around the financial crisis."

Bee staff writer John Holland can be reached at jholland@modbee.com or 578-2385.