Call it the holiday season that never came.
As the nation's retailers post their fourth quarter profits, the financial impact of the dismal 2008 holiday shopping season is becoming clearer. The retail industry is trying to work its way out from under an avalanche of unsold goods, some going as far as shipping them back overseas to clear out their bulging warehouses. The misery is rippling to producers around the world.
Battered by the ongoing slide in the job and housing markets, consumers continue to tighten their budgets. Many shoppers are downshifting to discount chains like Wal-Mart — the world’s largest retailer last week posted a 7.4 percent drop in fourth quarter profits — leaving other retailers out in the cold.
On Tuesday, discounter Target said it is struggling with slower sales and rising delinquencies in its credit card business. Macy's said Tuesday that fourth-quarter earnings fell nearly 60 percent.
The outlook is bleak. Americans' confidence in the economy sank to new lows in February, according to the New York-based Conference Board. And another widely watched index showed home prices tumbled by the sharpest annual rate on record in the fourth quarter and in December.
"Looking ahead, increasing concerns about business conditions, employment and earnings have further sapped confidence and driven expectations to their lowest level ever," Lynn Franco, director of The Conference Board Consumer Research Center, said in a statement.
For many retailers, steep prices cuts have been the only way to keep people coming in their stores. Those cuts have taken a big bite out of profits; industrywide, fourth quarter profits are expected to plunge 24 percent compared to a year earlier, according to Ken Perkins, president of retail industry researcher RetailMetrics. He expects profits to fall another 19 percent in the first quarter of this year.
Despite those deep discounts, weak holiday sales and continued sluggish spending have left the industry with a mounting piles of unsold goods, according to Irwin Jacobs, whose Jacobs Trading Company is one of the world’s largest liquidators.
“This thing caught everybody by such incredible surprise,” said Jacobs, who has been in the liquidating business for nearly 50 years. “We are seeing unprecedented (volume).”
Jacobs says he is now shipping merchandise as a far away as Siberia to find a market for unsold U.S. goods. He’s also hearing from global producers around the world who need to liquidate goods that U.S. retailers can no longer sell.
“Asia is just overflowing with goods,” he said. “There’s bankruptcies left and right where the factories have canceled (production.) They’ve got the stuff made and they can’t operate.”
Though the consumer slowdown started last year, rising job losses and falling home prices have accelerated the drop in spending power. Until those two trends begin to reverse course, consumers will likely remain tight-fisted. That means retailers will be ordering less merchandise for the coming months, putting additional pressure on suppliers.
To cope with the plunging profits, retailers have been slashing costs. Despite its relative strength Wal-Mart is also pulling back — including shedding 700 to 800 headquarters jobs, scaling back the number of new stores it plans to open and cutting inventories.
Target said in late January that it will cut 9 percent of its headquarters staff, close a distribution center and reduce new-store openings as it battles the weak economy. The company also is freezing senior managers' salaries, ending share repurchases, tightening consumer credit-card underwriting and credit granting and improving store productivity.
Earlier this month, Macy’s said it is cutting almost 4 percent of its work force, slashing capital spending, cutting its contributions to its employees' retirement funds and cutting its dividend to preserve cash. In January, the company said it would close 11 stores, affecting 960 employees.
Since the recession began in Dec. 2007, the retail industry has shed roughly 570,000 workers.
The government’s recently enacted economic stimulus package is supposed to help revive spending, but some in the industry think it doesn’t go far enough to shore up the retail industry.
“There may be as many as 100,000 retail jobs lost per month in '09,” Michael Ullman, J.C. Penny's chief executive, told CNBC last week. “We're trying to make the point to our representatives that it's a critical situation.”
As they whittle away at piles of unsold goods, store managers also are changing the way they do business.
“They've been forced to,” said George Whalin, who follows the industry at Retail Management Consultants. “When you begin to look at your marketplace, and you see that in many cases it's 20 percent, 25 percent less volume into your stores, you have to look at your business differently. You have to reposition it. You have to look at your pricing, look at your merchandise selection. All of those things.”
Some retailers are also getting tougher with vendors and trying to squeeze their costs as they’re forced to cut their selling price to keep customers shopping. That’s touched off an intense round of haggling over who takes the hit when goods are heavily marked down; some retailers are going back to vendors and asking them to share the pain.
The squeeze is also helping low-end retailers. They are seeing increased foot traffic from upscale shoppers who are tightening their belts. That's helping companies like Target and Costco do relatively well in an otherwise dismal climate.
“The more affluent customers are trading down, and we think those two are positioned well to benefit from that,” said Kimberly Picciola, a retail industry analyst with Morningstar. “Consumers are really taking a more modest approach to spending their discretionary dollars; we think the idea of being cheap is chic.”
Retailers also face the impossible task of trying to forecast when consumer spending will pick up again. So far, there is little indication the economy is approaching the bottom. There have been some modest signs of improvement — sales in January inched up by one percent compared to a dismal December.
For some retailers, the situation is life or death. Already chains like Circuit Circuit, KB Toys and Linens ’n Things have filed for bankruptcy and moved to shut down thousands of stores. More bankruptcies are expected this year as consumer spending takes its biggest plunge since the recession of the early 1990s. That downturn saw six of the ten biggest retail bankruptcies on record, according to Douglas Sandler, an investment manager at Riverfront Investment Group
“If you are in a business where the net margins are 3 percent and the consumer stops spending and you see volumes drop 10, 20, 30 percent, you don't make it to the other side,” he said.