Major retailers' cautious ordering of goods is expected to salvage what could have been dismal fourth-quarter profits, but the 2008 outlook looks more sobering. While stores can manage how much merchandise they order, they can't direct consumer spending — which is on the skids.
In recent years, retailers have been focusing on leaner inventory and buying less goods in advance. But the sharp dropoff in people's spending since last fall has taken stores by surprise.
"Retailers can control inventories and expenses to a certain degree but it is not finite. The most important component — and one they have least control of — is consumer demand," said Stifel Nicolaus analyst Richard E. Jaffe.
Michael Appel, a managing director of Quest Turnaround Advisors, said that stores would rather have sold-out items than be left with piles of inventories that would have to be marked down. But there's also a risk of playing it too safe, with conservative fashions that may not be inspiring to shoppers.
Major retailers begin reporting their fourth-quarter earnings results next week, and the data is expected to show how bad things have become and what merchants are doing to get shoppers to spend.
Overall, the U.S. retail industry is bracing for its bleakest times since the 1991 recession. In recent weeks, merchants such as Macy's Inc., Sears Holdings and AnnTaylor Stores have closed hundreds of stores, laid off thousands of employees, scaled back store expansions or pared inventories as consumer spending screeches to a halt.
"We are looking at recession levels of spending for consumers," said Frank Badillo, vice president and senior retail economist at consulting company Retail Forward. "It's clearly a difficult environment for retailers that is going to continue for the better part of the year."
Consumers — weighed down by rising gas and food prices, an escalating credit crisis and slumping housing prices — are expected to hunker down for at least the first half of the year. The government's economic stimulus package, which offers rebate checks ranging from $300 to $1,200 to more than 130 million Americans, may provide only brief relief this summer.
Last week, the nation's stores reported their worst January sales performance — a meager 0.5 percent gain — in almost four decades. That followed an anemic 0.7 percent pace in December, and was far below last year's average gain of 2.1 percent.
February looks to be no better. As retailers try to control costs, Jaffe estimates that inventory for February is down anywhere from 5 percent to 18 percent from a year ago for the 16 apparel retailers he follows.
Mall-based apparel stores have been hit the hardest because fashion is seen as discretionary. The only bright spots have been wholesale clubs like Costco Wholesale Corp. and off-price stores like TJX Cos., which operates stores such as T.J. Maxx. These outlets have benefited as shoppers trade down to less expensive stores.
Wal-Mart Stores Inc., the world's largest retailer, backed its fourth-quarter outlook last week, though it reported January sales below Wall Street expectations.
Analysts have been lowering their fourth-quarter profit expectations in recent weeks. Ken Perkins, president of research company RetailMetrics LLC, said fourth-quarter earnings for the 130 retailers he tracks are expected to be down 5.4 percent, compared to a 1.2 percent increase expected at the beginning of December.
He also expects to see retailers start cutting first-quarter earnings outlooks when they report fourth-quarter results.
Jaffe said he wants to hear retailers say how they intend to manage the difficult economic environment, but noted that reduced earnings outlooks from two key apparel suppliers for retailers — Liz Claiborne Inc. and Jones Apparel Group Inc. — do not bode well for retailers' results.