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Retail prospects look gloomy

2008 is shaping up as another tough year for sales.

By MARK ALBRIGHT, Times Staff Writer
Published January 15, 2008

ADVERTISEMENT [AP photo] A shopper passes a store's clearance sign at a shopping mall in Augusta, Maine, recently. The economic outlook has grown shaky after many big retailers reported weaker-than-expected sales.

NEW YORK - The consumer spending pullback that haunted retailers' holiday shopping season will linger well into 2008 and could turn into Exhibit A for a national recession.

The "R" word didn't make the official forecast as the National Retail Federation opened its annual convention here. But the possibilities are top-of-mind as many retailers are mapping plans to rein in inventory and trim expenses if things deteriorate further. Meanwhile, evidence in December's weaker retail sales figures is piling up that cautious consumer spending is spreading to higher income levels.

"It's going to be an ugly year for retailing," said Brian Tunick, a securities analyst with JPMorgan.

Usually a time of public hand-wringing over optimistic Christmas sales that didn't materialize, this year's gathering of about 5,000 of the nation's top retailing executives is decidedly more glum after a holiday most expected to be weak turned out to be even weaker. And consumers are expected to become more tight-fisted.

"We have a guarded view about the economy in 2008," said Rosalind Wells, chief economist for the federation. "We see a continued slowdown in spending, but not a recession."

She is forecasting a modest 3.2 percent gain in general merchandise sales the first half of 2008. That's a bit worse than roughly a 4 percent gain in retail sales the Commerce Department is expected to report today for the two-month holiday season. The federation is counting on the Federal Reserve easing interest rates and some form of economic package from Congress and the White House to improve the second half of 2008.

Economists define a recession as gross domestic product dropping into negative territory for at least six months. While incomes have held up, some analysts think a recession began in December nationally, partly because of higher unemployment, anemic job creation and the weakest Christmas retail season in five years.

In December, however, more types of retailers that had avoided the slowdown joined the afflicted in the auto, furniture and home-improvement industries. Sales in jewelry, apparel and handbags slumped, as well.

Sales weakened in many luxury stores such as Nordstrom as customers traded down to Macy's or Dillard's. Some analysts seized on dramatic same-store declines at chains such as Kohl's and JCPenney that had not slipped into negative numbers for years.

Electronics and personal care retailers fared well.

Cautious moves

Few retailers are waiting for a government fix. Some, like Wal-Mart Stores and Abercrombie & Fitch, are shifting capital spending to open more stores in other countries while cutting back their U.S. growth. The biggest retailers plan to close more than 5 percent of their poor-performing stores, twice as much as the typical, annual cutback.

At one session where speakers extolled the benefits of new computer systems to pick store sites, questions zeroed in quickly on how to spot rosy population projections in emerging suburbs where construction has halted and housing prices are plummeting. Many chains that once leaped to pay premium rent to be first in thinly populated new suburbs now have second thoughts.

"We are being more careful," said Jaye Pericone, vice president of real estate for PetSmart, which has physically revisited each new store site and is focusing more on current, not projected, population.

Such widespread industry caution is exerting more pressure on developers trying to herd national tenants into the Cypress Creek Town Center and Shops at Wiregrass, two mall-sized retail projects under construction in east Pasco County.

Elsewhere, store designers say retail clients are asking them to draw up smaller prototypes, re-engineer stores with cheaper materials or develop store-within-a-store departments to boost sales productivity. That's in addition to the store closings.

"This industry mood has been ostrich-like so far," said Nina Kampler, executive vice president of strategy for Hilco Real Estate, a firm that specializes in distressed retail workouts, as she scouted prospects. "But it is encouraging they are finally acknowledging that store closings have to accelerate."

Mark Albright can be reached at albright@sptimes.com or (727) 893-8252.

Closings likely

In the next few weeks, analysts say, retailers will begin announcing store closings of 5 to 6 percent to atone for a building binge that in the past five years added 25,000 stores.

Among the most likely candidates: Macy's, Gap, Old Navy, Sears, Kmart and JCPenney.

[Last modified January 14, 2008, 22:47:57]