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Portfolio > ETFs > Broad Market

Grinch Looks Poised to Steal Christmas From Retailers, Mall Owners

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The year’s longest sustained sales season encompassing Thanksgiving and Christmas is just on the horizon, but early indicators suggest little holiday cheer for retailers as American consumers seem set to remain on the sidelines and retailers are forced to shut stores.

Adrienne Tennant, an analyst with Janney Capital Markets in Washington, D.C., says retailers observed this past weekend in the firm’s retail survey were “offering ‘additional percentages off’ already reduced items in order to move through end-of-season inventories.” The Janney analyst says apparel retailers are already deeply discounting inventory: “At the Gap, the company was running an extra 50% off women’s markdowns, at Ann Taylor already reduced styles were an extra 50% off, and at Talbots sale items were an extra 30% off.”

The Zero Hedge blog, citing Bloomberg Brief, reports that “mall vacancies are at the highest level in measured history” rising to 9.4% at regional and super-regional malls. Vacancies hovered at around 5% in the early 2000s and began to soar as the recession took its toll in 2008, but never recovered as the recession ended. The report blames Internet shopping for the bankruptcies of Border’s, Circuit City and Linens and Things and warns the trend portends a further blow to employment.

As if on cue, home improvement chain Lowe’s announced Monday it would close 20 of its big-box stores and lay off nearly 2,000 workers. The retailer said consumers were limiting home renovation to projects costing less than $500. Meanwhile, the Gap has fallen into a financial tight spot and is shutting down 190 of its retail outlets, a 21% reduction in its stores. None of this augers well for retail space at malls, or for retail sales.

Janney’s Tennant sees evidence of sales, but there’s a catch: “We continue to note that, generally speaking, deeper and broader promotions are necessary to keep consumers spending.” Another catch is that consumers seem to be spending “when there is a need, like back to school.” She does not expect that resiliency to persist, however, saying holiday spending “will begin to show more of the underlying issues that are plaguing the consumer and will ultimately be a disappointment.”

Those underlying issues include the litany of woes plaguing the weak economy over the recent past: high levels of unemployment; wage income growth that is not keeping pace with inflation; a negative wealth effect resulting from stock market declines and volatility; and the stagnant real estate market. Tennant also cites market-specific apparel cost inflation in the 10% to 15% range for 2011 holiday season and lower levels of discretionary income as inflation in other areas that will eat into consumers’ largely fixed budgets.

The Janney analyst points to guidance from shoe manufacturer Crocs (CROX) and women’s apparel retailer Coldwater Creek (CWTR)–which sent shares of both companies plummeting Tuesday–as evidence for a softening economy ahead of the coming fall sales season. She did have one favorite stock to recommend, however: “We are sticking with our best idea ANF [Abercrombie and Fitch] with its international growth and offensive promotional strategy domestically.”


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