After Weak Holiday Sales, Retailers Prepare for Even Worse

Hiroko Masuike for The New York Times

On Thursday, Saks in Manhattan slashed prices to attract shoppers. The retail chain had a slide of nearly 20 percent in same-store sales for December.

Graphic

Retail Sales in December

On Thursday, many chains reported the worst holiday shopping season in decades, and the stores are entering the new year so weakened that some might not survive. A wave of corporate failures that has already taken out stores like Sharper Image and Linens ’n Things is expected to grow substantially worse in coming months, sending some of the well-known names of American retailing into bankruptcy.

Thursday’s numbers were, in themselves, no surprise. The weak economy, rising unemployment, winter storms and a dearth of compelling fashions hurt all kinds of retailers in December. On Thursday, many reported double-digit sales declines at stores open at least a year, a measure known as same-store sales and a barometer of retail health.

Industry sales fell 2.2 percent for the holiday shopping season, the biggest decline since at least 1970, according to the International Council of Shopping Centers. December sales dropped 1.7 percent on top of even-weaker November sales, when chains posted a 2.7 percent decline, the council said.

Those numbers would be worse except for some huge categories, like food and beverages, on which consumers were less likely to cut back.

While November and December were tough, people at least had a reason to shop in those months. Retailing analysts say the next couple of months may prove to be even more difficult.

“Even the best of breed are closing stores,” said Bill Dreher, senior retailing analyst at Deutsche Bank Securities. “That inventory will need to be liquidated into a market where consumers have no desire to spend.”

The number of retailers filing for bankruptcy protection surged last year, but the chains that filed — including Circuit City, KB Toys, Mervyns, Boscov’s, Steve & Barry’s and Sharper Image — were already weak.

The next wave of filings is likely to include stores that are doing many things right, but that are reeling from a high debt load in addition to a slowdown in sales brought on by the recession.

“What we’re now entering into is going to be the hardest quarter,” said Marshal Cohen, chief industry analyst for the NPD Group. “During the holidays, consumers must buy something for someone. We’ve now entered into the postholiday period, where consumers buy based on desire rather than need. The numbers are going to get worse before they get better,” he said.

January is typically a slow month for retailers, and the significance of a December sales decline is far greater than a drop-off in January because sales in November and December account for 25 to 40 percent of many retailers’ annual sales, according to the National Retail Federation, an industry group.

Still, some stores cannot afford for consumers to go into hibernation this month. Many sold their Christmas merchandise at staggeringly low prices — an act that helped them trim their inventories and increase their same-store sales, but probably eroded their profit margins.

Indeed, retailers like Saks, Nordstrom, Macy’s, Target, Gap, J. Crew, Pacific Sunwear and Chico’s said Thursday that their margins had been hurt by their aggressive holiday promotions.

Even Wal-Mart Stores, the world’s largest retailer and a rare winner in this economy as consumers trade down, missed analysts’ expectations and lowered its projection of future results, indicating more rocky months ahead.

In December, Wal-Mart had a 1.7 percent same-store sales increase, not including fuel, but it said Thursday that it expected little improvement this month, with January same-store sales likely to be flat or 2 percent higher.

Thomas M. Schoewe, the company’s chief financial officer, estimated Wal-Mart’s fourth-quarter earnings at 91 to 94 cents a share, down from the company’s previous expectation of $1.03 to $1.07. (The retailer is taking an after-tax charge of about 6 cents a share for the settlement of 63 class-action wage and hour lawsuits.)

Given the economy, Wal-Mart and other retailers are not taking any after-Christmas break from trying to attract customers.

“We’re already starting to see markdowns on spring-related goods coming even earlier this year, despite lower inventory stocks,” said John D. Morris, a retailing analyst at Wachovia Securities who studies promotions at the nation’s malls. “That’s a telling sign.”

To keep consumers coming in the usually slow months after the holidays, Wal-Mart said Wednesday that it was lowering the prices of items that might help people keep their health and fitness resolutions — like a Gold’s Gym elliptical machine for $297 (down from $327) and an eight-pack of Yoplait Light yogurt for $3.50 (down from $4.28).

Stores are also thinking about their orders for next Christmas, which must be placed early in the year. One thing is certain: they will buy less.

This past Christmas, retailers drastically cut prices to drive shoppers through their doors, said Michael P. Niemira, chief economist and director of research at the International Council of Shopping Centers. “But even that strategy was not enough,” he said, “as the elevated worry about job insecurity and increased job layoff announcements continued to restrain consumers’ willingness and ability to spend.”

Department stores of all types, as well as many specialty apparel retailers, struggled. Same-store sales in the specialty retail stores segment of Neiman Marcus, which includes Neiman Marcus and Bergdorf Goodman stores, tumbled 31.2 percent. Sales at Saks sank 19.8 percent. Both high-end chains had improved their same-store sales in November but did not manage to continue the trend in December.

At Nordstrom, sales were down 10.6 percent, though that was better than its 15.9 percent decline in November.

Sales at mall retailers also fell by double digits, including Abercrombie & Fitch (down 24 percent), American Eagle Outfitters (down 17 percent), Gap (down 14 percent), Wet Seal (down 12.5 percent), Chico’s (down 12.4), Zumiez (down 12.3 percent), and Limited Brands and Pacific Sunwear of California (both down 10 percent).

December sales fell 8.1 percent at J. C. Penney, 7.3 percent at the Sears Holdings Corporation, 5.8 percent at Bon-Ton, 5 percent at Dillard’s and 1.4 percent at Kohl’s.

Macy’s said Thursday that it would close 11 stores, though its chief executive, Terry J. Lundgren, said in a statement that the closings were “part of our normal-course process to prune underperforming locations each year.” The retailer’s same-store sales fell 4 percent in December.

Sales at TJX Companies, Ross Stores and Children’s Place Retail Stores were flat.

Still, some niche retailers rose above the gloom.

Sales increased by double digits at teenage apparel retailers Buckle (up 13.5 percent) and Aeropostale (up 12 percent). Hot Topic — which struck gold by selling merchandise inspired by the hit teenage vampire film “Twilight” — had a 4.3 percent sales increase.

A Wal-Mart rival, BJ’s Wholesale Club, also fared well in December, with sales rising 5.9 percent, excluding fuel.

Other discounters, like Target and Costco Wholesale, were softer, with sales down 4.1 and 4 percent, respectively.

In what passes for good news these days, the erosion in retail sales seemed to slow a bit at the end of December. Michael McNamara, vice president for research and analysis for SpendingPulse, said this week that lower prices of gasoline, extreme discounts, drier weather, pent-up consumer demand for discretionary items, and a calendar shift helped the declines in sales stabilize.

But analysts do not expect that to last. Dean Hillier, a partner and a retail specialist with A. T. Kearney, a management consultancy, said consumers no longer have much appetite for whipping out their wallets.

“That blanket of gloom will get heavier in the next little while,” he said.

U.S. Payrolls Post Biggest Annual Drop Since 1945

By Shobhana Chandra

Jan. 9 (Bloomberg) -- The U.S. lost more jobs in 2008 than any year since 1945 as employers fired another 524,000 people in December, indicating a free-fall in the economy just days before President-elect Barack Obama takes office.

“Consumers are now going to get more and more scared at the prospect of losing their job,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts. Obama’s proposed fiscal stimulus “needs to be big, needs to be bold, needs to be swift. If they can do something quickly we can limit the hemorrhage by mid-year.”

The Labor Department reported that the nation lost 2.589 million jobs in 2008, with the unemployment rate climbing more than economists forecast, to a 15-year high of 7.2 percent in December.

Today’s figures will intensify pressure on U.S. lawmakers to speed Obama’s recovery program, which may exceed $775 billion, through Congress in an effort to save or create 3 million jobs. They also underscore the urgency of the Federal Reserve’s $200 billion initiative to restart consumer financing markets that’s scheduled to begin next month.

The outlook for jobs this year is no brighter as retailers from Wal-Mart Stores Inc. to Macy’s Inc. slash profit forecasts and manufacturers including Alcoa Inc. cut output and staff.

Stocks, Treasuries

Stock-index futures rose and Treasuries fell amid relief among some investors that the drop in payrolls wasn’t even bigger. Futures on the Standard & Poor’s 500 Stock Index rose 0.4 percent to 910.70 at 9:10 a.m. in New York, and yields on benchmark 10-year notes were at 2.47 percent, from 2.44 percent late yesterday. The dollar gained 1 percent to $1.3568 per euro.

Payrolls were forecast to drop 525,000 after a previously reported 533,000 decline in November, according to the median estimate of 73 economists surveyed by Bloomberg News. Revisions subtracted 154,000 from payroll figures previously reported for November and October.

The jobless rate was projected to jump to 7 percent from a previously reported 6.7 percent in November.

Obama is pressing for a stimulus plan including tax cuts and spending on everything from roads and schools to the energy network. Yesterday he called for “dramatic action as soon as possible” to help pull the world’s largest economy out of a slump that’s in its second year. “If nothing is done, this recession could linger for years,” he said in Fairfax, Virginia.

Benchmark Revisions

With today’s report, Labor revised figures from its household survey, which includes the unemployment rate, going back five years. Benchmark revisions to the payroll figures will be announced in February.

Last month’s decline was the 12th consecutive drop in payrolls. The economy created 1.1 million jobs in 2007.

Today’s report showed factory payrolls shrank 149,000, the biggest drop since August 2001, after decreasing 104,000 in November. Economists had forecast a drop of 100,000.

The decrease included a loss of 21,400 jobs in auto and parts industries. Manufacturing, which makes up 12 percent of the economy, shrank in December at the fastest pace in 28 years, Institute for Supply Management figures showed.

Payrolls at builders dropped by 101,000 after decreasing 85,000. Financial firms reduced payrolls by 14,000, after a 28,000 loss the prior month.

Services Jobs

Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 273,000 workers after a decline of 402,000. Retail payrolls dropped by 66,600 after a 100,000 decrease.

Government payrolls increased by 7,000 after falling 3,000 the prior month.

Fed staff last month cut projections for gross domestic product and the job market, stating the unemployment rate was “likely to rise significantly into 2010,” according to minutes of policy makers’ December meeting.

Analysts said the economy may be in danger of a reinforcing cycle of rising unemployment and declining household spending, what policy makers call a negative feedback loop, which is difficult to snap once it’s begun.

“This was the most rapid deterioration in the labor market over a six-month period since 1975,” said Michael Darda, chief economist at MKM Partners LP in Greenwich, Connecticut. “Policy makers will go full throttle” until “the labor market starts to turn,” he said.

Wal-Mart, the world’s biggest retail chain, yesterday said fourth-quarter profit will miss its earlier forecasts after sales rose less than analysts anticipated. Macy’s said December revenue slipped 4 percent and announced it would close 11 stores.

Retail Sales

Sales at stores open at least a year dropped 2.2 percent in the last two month months of 2008, the biggest holiday-season decline since the International Council of Shopping Centers started keeping records in 1970, the group said yesterday.

“These are extraordinary times, requiring speed and decisiveness to address the current economic downturn,” Klaus Kleinfeld, chief executive officer of Alcoa, said in a Jan. 6 statement announcing 13,500 job cuts worldwide. The world’s largest aluminum producer said it will trim an additional 1,700 contractor positions and froze hiring and salaries in some areas.

Some companies have taken other steps to lower costs. Caterpillar Inc., the world’s largest maker of construction equipment, will put 814 workers on an “indefinite” layoff, shipper FedEx Corp. cut the pay of Chief Executive Officer Fred Smith and other employees, and auto-parts supplier Visteon Corp. said it will trim the workweek and some salaries.

The average work week shrank to a record-low 33.3 hours from 33.5 hours, today’s figures showed. Average weekly hours worked by production workers dropped to 39.9 hours from 40.3 hours, while overtime decreased to 3 hours from 3.3 hours. That brought the average weekly earnings down by $2 to $611.39.

Workers’ average hourly wages rose 5 cents, or 0.3 percent, to $18.36 from the prior month. Hourly earnings were 3.7 percent higher than December 2007. Economists surveyed by Bloomberg had forecast a 0.2 percent increase from November and a 3.6 percent gain for the 12-month period.

Yet Another Gruesome Employment Report

For most of the past decade, I've happily ignored the payroll report on the first Friday of every month. The market often got very excited about it, but the headline payrolls number was generally unreliable and full of more noise than signal.

The unemployment number, however, wasn't. And the 7.2% unemployment rate -- which rises to a whopping 13.5% if you use the broader figure which includes the underemployed as well -- is very, very scary. We knew we would almost certainly see these numbers at some point in 2009, but the fact that we got there by the end of 2008 really underlines just how bad this recession is becoming.

The fact that unemployment is rising fast has no silver linings. Does it mean that companies are reacting fast and decisively to the recession, laying off workers in good time to avoid closing their doors entirely? There's not much evidence of that. Instead, it means higher unemployment payments, lower consumer sentiment and spending, and the continuation of a vicious spiral which is reaching Charybdis-like proportions.

If you're desperate for good news, you can cling to the 5-cents-an-hour increase in wages, but don't expect earnings to rise in 2009 by anything like the 3.7% they went up in 2008. Or maybe you can take solace in the fact that the headline payrolls figure (if you ignore the unemployment figure) was at least in line with expectations. But for me, that just means that economists and forecasters have finally woken up to grim reality.

Maybe the only real upside to this report is that it should light a fire under Congress to pass a stimulus package sooner rather than later -- including the release of the second tranche of TARP funds. Let's start getting money out the door now: that's more important than haggling over what goes where.

Industrial Output Falls Across Europe as Recession Deepens

By Jana Randow

Jan. 9 (Bloomberg) -- Industrial production plunged throughout Europe in November as the global recession deepened, adding pressure on the European Central Bank to cut interest rates.

Industrial output in Germany, the euro area’s largest economy, fell a seasonally adjusted 3.1 percent from October, extending the worst decline since data for a reunified Germany was first compiled in 1991, the Economy Ministry in Berlin said today. In France, production tumbled 2.4 percent in November, the fourth monthly decline, the statistics office in Paris said.

Companies are scaling back production and cutting jobs after the global financial crisis pushed Europe into a recession last year. Interest-rate cuts of 175 basis points and billions of euros in stimulus measures have failed to reverse a slide in consumption and confidence. The 16-nation euro area will shrink in 2009 for the first time since the single currency began a decade ago, according to forecasts from ECB staff and the International Monetary Fund.

“The ECB still has room for maneuver,” said Dominic Bryant, an economist at BNP Paribas in London. “There’s not much point in waiting when you know that you’ll get bad data. It doesn’t take a genius to work out that the fourth quarter will be extremely weak in the eurozone.”

Industrial production in November also declined in Spain, Greece, Slovenia and the euro area’s newest member, Slovakia, reports released today show. It also fell in Britain, which has resisted pressure to ditch sterling for the euro.

Worsening Recession

Central bankers have refused to give any guidance on the future path of borrowing costs after the ECB delivered the biggest rate cut in its 10-year history in December, bringing down interest rates to 2.5 percent. President Jean-Claude Trichet said on Dec. 30 looser monetary policy is ”far from having been fully transmitted to the economy,” signaling the bank may pause next week.

Today’s data add to evidence that Europe is sliding deeper into recession. ECB staff in December projected the euro-area economy to contract by an average of 0.5 percent this year. While it is premature for the bank to revise its projections, it “cannot rule out that economic activity in 2009 may turn out to be weaker than suggested,” ECB Vice President Lucas Papademos said on Jan. 3.

European economic confidence plunged to a record low last month as production and employment expectations deteriorated, the European Commission said yesterday. The euro-area jobless rate increased to 7.8 percent in November from a historic low of 7.2 percent between November 2007 and March 2008.

Rate Cuts

Europe’s inflation rate fell to 1.6 percent in December, the lowest in more than two years after oil prices retreated 72 percent from a record $147 a barrel in July. If the rate falls too far below the ECB’s goal of just below 2 percent “we can be certain that European monetary policy will respond with interest-rate reductions,” ECB Governing Council member Vitor Constancio said on Jan. 5.

In December, EU leaders pledged economic-stimulus steps worth 200 billion euros ($274 billion), or about 1.5 percent of gross domestic product, to combat the fallout from the financial crisis. The German government is considering a second, 100 billion-euro fund to directly aid non-financial companies. French President Nicolas Sarkozy said yesterday the proposal is an “excellent idea” that France will emulate.

States of emergency declared across Europe over gas

David Charter in Prague, Adam LeBor in Budapest and Helen Womack in Moscow

Governments across Europe declared states of emergency and ordered factories to close as Russia cut all gas supplies through Ukraine yesterday in their worsening dispute over unpaid bills.

José Manuel Barroso, the European Commission President, accused the two countries of taking the EU’s energy supply “hostage” amid a cold snap across the Continent, and urged them to reopen the pipelines immediately.

Schools and factories were closed and trees were felled to keep home fires burning after Russia turned off the gas taps to more than a dozen countries. It was a clear demonstration of the dependence of the Continent on Russian gas supplies.

Despite temperatures as low as minus 27C and the threat of heating cuts to millions of households, Moscow said that it had no choice but to cease supplies because Ukraine, the country through which 80 per cent of Russian gas bound for Europe flows, had closed its pipelines. The claim was denied by Kiev.

Countries tapped into their reserves and urged the use of alternative fuels but at least 15,000 households in Bulgaria – which gets 92 per cent of its gas via the Ukrainian pipelines – found their heating cut off overnight.

Slovakia’s Government followed Bulgaria by announcing that it may have to restart a mothballed Soviet-era nuclear power plant.

The Balkan states, which rely almost completely on Russian gas and have failed to develop modern infra-structures or alternative energy sources, have been the hardest hit at the time of the Orthodox Christmas.

In Sarajevo, the capital of Bosnia-Herzegovina, there were bitter memories of the Bosnian conflict from 1992-95, when the population cut down trees to try to stay warm or bought coal on the black market.

Sven Alkalay, the Bosnian Foreign Minister, said: “Four million of our citizens are in danger.” Almir Becarevic, the manager of the state gas company, said: “If this lasts it could turn into a humanitarian disaster. We pray that someone can find a solution.”

To try to restart supplies, the EU proposed yesterday that it should send independent monitors to watch the dials on the pipes at Ukraine’s borders. Russia claims that Ukraine is taking gas it has not paid for from the pipelines, reducing the onward supply to Europe. It has responded by cutting supplies in the pipeline by the amount it says Ukraine is stealing.

By checking how much gas is entering Ukraine from Russia and then measuring how much emerges at its western borders with Europe, the EU hopes to establish who is to blame for the shortages.

Mr Barroso said that he had agreement in principle for the process from Vladimir Putin, the Russian Prime Minister, and his Ukrainian counterpart, Yuliya Tymoshenko, who will send officials to Brussels today to thrash out the details. Mr Barroso spoke to both leaders yesterday, but he said they continued to blame each other. “Prime Minister Putin told me that Russia is providing the gas destined for the EU, Prime Minister Tymoshenko told me that they have created no problems with transit through Ukraine,” an exasperated Mr Barroso said. “The conclusion is clear: if both Russia and Ukraine behave as they say they are behaving, there should be no problem.”

He added: “If Ukraine is trying to be closer to the European Union, it should not create problems when it comes to the supply of gas to the EU.”

Yet 12 countries received no Russian gas at all yesterday: Austria, Bulgaria, Slovakia, the Czech Republic, Bosnia, Croatia, Greece, Hungary, Macedonia, Romania, Serbia and Turkey. France, Italy, Germany and Poland reported that their supplies from Russia were markedly down.

The International Energy Agency, which is the energy-monitoring and policy arm of the Organisation for Economic Cooperation and Development, said that the situation was “completely unacceptable, given that European customers are not a party in this dispute.

“Despite the reassuring statements late December by both parties that supply to Europe would not be interrupted, supplies have now come to a complete halt,” it said. “The interruption is creating hardship during the coldest weather Europe has faced within a number of years.”

The US showed who it blamed for the crisis when Stephen Hadley, the National Security Adviser, warned Moscow that using its energy exports to threaten its neighbours would undermine its international standing.

Amid mounting fears of shortages in Germany and France, Britain has begun to export emergency supplies of gas to Europe. The flow in the pipeline connecting Britain to Belgium and beyond, which normally imports gas to Britain, was reversed late yesterday after prices on the Continent rose.

Analysts said that the weak pound was encouraging European suppliers to use Britain as a cheap transit route for Norwegian gas.