The Worst Holiday Sales Season of All Time?

2008-12-28 | 10:07

Retailers brace for major changes.

During the holiday season, when retailers typically generate as much as 40% of their annual sales, Americans actually cut their spending, according to industry experts. Total retail sales, excluding gasoline and autos, were down between 2.5% and 4% this holiday season, compared with the same period in 2007, according to MasterCard Inc.'s SpendingPulse unit. That makes it among the worst holiday seasons of all time, says Michael McNamara, a vice president.

One of the few exceptions was Amazon.com, which posted a gain for the year. But overall, online sales were down slightly from the year-ago holiday season.

No question that 2008 was bad year for retailers...and the start of 2009 looks even worse. Industry experts expect a range of stores to close their doors forever in the new year, while others are expected to trim their growth plans.

he first retail casualty of the weak holiday season could be Goody's Family Clothing Inc., a Southeast apparel retailer. The 287-store chain emerged from bankruptcy court in October but its holiday sales were below plan and financing it was counting on didn't materialize, according to a person familiar with the situation. The retailer is negotiating with lenders to avoid potential liquidation, say two people familiar with the matter.

A representative for Goody's was unavailable to comment. But in October, Chief Executive Paul White was upbeat about its prospects, saying "we are energized by the opportunity in front of us and are focused on continuing to fulfill the Goody's mission."

Other retailers are saying they will trim inventory and reduce the number of suppliers. That, in turn, will cause a ripple effect, prompting a number of weaker manufacturers, small brands and underfunded fashion labels to fail. New retail formats and concepts stores are likely to be curtailed in the coming year. And luxury-goods makers already are working to cut the long lead times between orders and store delivery as a way to reduce risk.

"We will have a lot fewer stores by the middle of 2009," observed Nancy Koehn, professor of business administration at Harvard Business School. "It's happening very, very quickly because of the financial crisis and the recession."

According to an article in The Wall Street Journal, analysts estimate that from about 10% to 26% of all retailers are in financial distress and in danger of filing for Chapter 11. AlixPartners LLP, a Michigan-based turnaround consulting firm, estimates that 25.8% of 182 large retailers it tracks are at significant risk of filing for bankruptcy or facing financial distress in 2009 or 2010. In the previous two years, the firm had estimated 4% to 7% of retailers then tracked were at a high risk for filing. Retailers are particularly vulnerable to a recession because of their high fixed costs.

So as the new year unfolds, expect to see more bankruptcies, fewer concept stores, fewer retail units and less selection as the U.S. retail market undergoes a painful, and long overdue, overhaul.