The Ghost of Christmas (Just) Past

The Ghost of Christmas (Just) Past

Implications:
1) Retailers are going into extended period of struggling to survive
2) Consumer credit, the primary spending mechanism for mid and big ticket items, is broken
3) "Trading Down" is the consumer trend for 2009

This analysis was written for Gerson Lerhman Group and published Jan 2, 2009

Source Article: Retailers' holiday sales drop at least 5.5 percent www.msnbc.msn.com (view article)

Analysis:
With a wink and a nod to the esteemed Charles Dickens...

The dismal sales numbers are starting to leak out from Christmas Season 2008, and once the numbers from the major retailers are announced on the 8th, it will be official: The "ghost" of this Christmas just past will be haunting retailers for a long, long time.

There is going to be excess inventory of high-end goods no one will purchase right now, regardless of how desirable they are. Cashmere sweaters are being pushed at a Buy one, get TWO free deal at the Off 5th Saks(NYSE:SKS) Outlets. What do you do to recoup your inventory investment in luxury goods when no one wants them?

Marginal store locations are going to be become cash flow drains on retailers with viable and previously successful business plans. Using Circuit City(NYS:CC) and Office Depot(NYSE:ODP) as examples of this, as the store count comes down, their corporate overhead gets split over fewer and fewer locations, increasing the pressure on each remaining unit to perform while cutting potential ability to advertise and market against their healthier competitors, in these specific cases, Best Buy(NYSE:BBY) and Staples.Pulling out of markets is a short-term and drastic solution if you aspire to be (or continue to be) a nationwide leader in your category. This solution doesn't address how they ended up at a competitive disadvantage to begin with, another "Ghost" that has to have a reckoning with some upper management at various firms.

Linens N Things(NYS:LIN), Mervyns; they are just the beginning of the shake out in retailing specialty and Department store chains. If you aren't nimble and financially strong enough to be able to both pick "Hot" value slanted goods and then price them right, you are in for rocky times with the consumer moving forward in the near term. This next year plus is going to be a "Survival of the Fittest" scenario for retail across the board. Consumers are wary of spending on anything but necessities, and will be until the housing and credit market meltdowns are on the way to being solved, and unemployment, a lag indicator, starts to improve.

Retail won't see things loosen up until the consumer credit mechanism is repaired in a way that allows people to be confident in their ability to spend more than is in the checkbook. Anecdotally, we saw Costco(NAS:COST) cut the price on a 60' Sharp(BSE:523449) LCD HDTV, featured at $3,999 at the beginning of December, to $3,499 the week before Christmas. Under normal circumstances, the $3,999 was a great, almost unbelievable, buy.

Electronics retailers have to be sweating, most people are thinking that 2 year old laptop isn't quite as in need of replacement as they thought it was.

Trading Down is going to be the consumer trend of 2009. Getting the car fixed instead of looking for a new one. If you need a vital appliance like a stove or washer that breaks, maybe taking a "Short-term" contract from a "Rent-to-own" company instead of hitting the local appliance store or Sears.

People are so unsure of the economic climate going forward, even a great retail concept with non-vital goods to market is going to need to work extra hard. Wal-Mart(NYSE:WMT) may be the king for quite some time to come.

Like Jacob Marley warning Scrooge he needs to change his ways, let's hope this season of despair leads to a fresh way of thinking about and solving the challenges ahead for the retail sector.
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