Make-or-break holiday season looms for retailers

WASHINGTON — Each day of financial tumult is bringing more pressure to bear on the nation’s retailers — and time is growing short.

Wednesday, as the clock ticked ominously down to the critical holiday season, department stores and clothing retailers reported a sharp drop in sales while Target said its shoppers are delinquent in their store credit card payments. Port traffic, meanwhile, has been plummeting as retailers cut back on inventory.

“I don’t think anyone predicted a crisis of this magnitude that couldn’t be fixed quickly,” said Bob Carbonell, chief credit officer for Bernard Sands, a retail rating and credit services agency. “If the American housewife puts the money under the mattress, we’re in deep trouble.”

In a year that seems to be defying all economic expectations, retailers are struggling to plot a course through the make-or-break holiday season, which accounts for nearly 20 percent of their sales each year. Will they have access to credit? How much merchandise should they order? Will anyone buy it? The moves they make now could determine where they stand in January.

The past three months were expected to bring the deepest cuts in consumer spending since the 1991 recession. September’s dire economic news — from the collapse of Lehman Brothers to the freefall in the financial markets to the government’s $700 billion rescue plan — have spooked shoppers and eroded confidence. On the day that the House of Representatives rejected the rescue plan, mall traffic plunged 12 percent, according to research firm ShopperTrak.

Early retail sales reports Wednesday reflected similar decisions by shoppers across the country. The best performers were discount retailers, but even they ranked below Wall Street estimates. Wal-Mart reported same-store sales at its domestic stores and warehouse club division, Sam’s Club, grew 2.8 percent in September compared to the same month last year. Costco grew 9 percent.

Department stores from Kohl’s to Nordstrom saw a drop in sales at stores open at least a year, a key measure of a retailer’s health known as same-store sales. Dillard’s, JCPenney and Saks plummeted by double digits.

Those grim reports are dimming retailers’ hopes for a recovery before sleigh bells jingle. Target reported a 3 percent drop in sales, partly because of the large number of defaults on its store credit card, and warned that its profit this quarter might be lower than expectations. Several other retailers lowered their performance outlooks. About two dozen more retailers are expected to release their figures Thursday.

“Right now the fear is high and the uncertainty is higher,” said Gene Tyndall, executive vice president at Tompkins Associates, a supply chain consulting firm.

Retailers are struggling to figure out how much merchandise they will need on shelves this holiday season. If they order too many reindeer sweaters, they will be stuck with unwanted — and unprofitable — merchandise the day after Christmas. If they do not stock enough to meet customer demand, they risk losing sales and frustrating shoppers.

Right now, retailers seem willing to risk the latter.

At Payless ShoeSource, chief executive Matt Rubel said Wednesday the company is keeping inventory below last year’s levels as traffic declines at the chain’s 4,500 stores.

“We’re being cautious on inventory and trying to be sure we don’t overbuy,” he said, “because we don’t want to have to give the product away.”

Wednesday, JCPenney chief executive Myron Ullman III said in a statement that the company is “tightly controlling” inventory as it heads in the final months of the year. Costco said the stock in each warehouse was down an average of $150,000 this quarter. Macy’s reduced its stock by 3.7 percent during the second quarter a year earlier.

“They don’t want to get caught long on inventory,” said Doug Hart, partner in the retail and consumer products practice at BDO Seidman. “Everybody’s already starting to talk about discounts early.”