Electronics in, clothes out for holiday sales

CHICAGO – Electronics are in, women’s clothes are out and leather handbags and jewelry are on the fence heading into next week’s unofficial start to the 2007 holiday season.

U.S. consumers are struggling with soaring fuel and food costs and the falling housing sector. At the same time, there are few, if any, must-have items getting shoppers excited.

“There aren’t a lot of segments in the retail sector that are poised to have a good holiday season,” said Ken Perkins, president of research firm Retail Metrics.

Many consumers think a recession could be looming, according to a recent survey by America’s Research Group. And analysts and investors are closely watching the holiday season to see whether those fears prove out.

“In our view, the consumer is on the precipice of experiencing its first recessionary phase since 1991,” David Rosenberg, North American economist at Merrill Lynch said in a research note earlier this month.

Even the luxury segment, once deemed immune to the economic issues that haunt the masses, has started to show some cracks.

Leather goods seller Coach Inc warned about weak traffic in its U.S. stores in October and upscale department store chain Nordstrom Inc posted an unexpected drop in same-store sales in October.

While luxury retailers will probably fare better than others, “we expect some impact across all price points because part of the recent spending boom was financed with consumer mortgages that were made possible by rising real estate prices,” credit rating agency Moody’s Investors Service said in a recent report.

As one way to counter this, Coach is trying to boost its standing as a gift destination, offering more entry-level items and gifts like scarves and key chains.

On the jewelry side, Zale, which is trying to reinvigorate its core mall-based stores, could still lose critical share this holiday season, Goldman Sachs analyst Adrianne Shapira said.

But farther up the diamond scale, Tiffany & Co should fare well, helped in part by its international business, one analyst said.

“We see the company as (a) strong and even safer play on the more sheltered high-end consumer, high international portion in its mix also a plus. Put Tiffany on your holiday list,” says CIBC analyst Dorothy Lakner in a research note.

Also on the good list could be Best Buy, helped by continued demand for hot electronics products such as high-definition televisions, video games and iPods, analysts said.

Meanwhile, rival electronics retailer Circuit City is going through an overhaul, cutting costs as it restructures its business, and recently announced that its merchandising and marketing executive vice president was leaving the company.

Apparel

In contrast to electronics, there are few, if any, must-have apparel items, and that sector should continue to have a tough time this holiday season, analysts said.

Women’s apparel retailers like Chico’s, AnnTaylor and Coldwater Creek are expected to continue to be laggards.

But a holiday winner could be trendy apparel retailer Guess, which recently raised its 2007 earnings forecast.

“We believe Guess remains one of the key fashion-driven winners that we believe can drive upside for the holiday season,” Brean Murray Carret analyst Eric Beder said this month.

The malaise in apparel could also carry through to many department stores. Kohl’s Corp, J.C. Penney and Macy’s all cut their forecasts for the current quarter this week.

But higher-end retailer Saks could do better, helped by its luxury-consumer mix of customers, Citigroup analyst Deborah Weinswig said.

Lower-priced retailers

Meanwhile Wal-Mart, the world’s largest retailer, got an early jump on the holiday season, announcing discounts on more than 100 toys on October 18.

On Tuesday, Wal-Mart reported a better-than-expected quarterly profit, helped by cost controls and better inventory management, and said it is “well-positioned to win in this environment.”

Things could be tougher for stores that cater to very low income shoppers, like Family Dollar and Dollar Tree.

“They’ll be hurt by those lower-income households that have fewer dollars in their pockets because it’s being sucked up into the gas tank,” said Frank Badillo, senior economist at TNS Retail Forward.

On the other hand, the quest for cheap gasoline could bring costumers to warehouse clubs like Costco and Wal-Mart’s Sam’s Club, Badillo said.