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Retailers in for Unhappy Holidays


But watch their moves during upcoming season so you can pick quality stocks.

It's only September, but retailers already have their eye on the upcoming holidays. With the disastrous 2008 shopping season in our rear-view mirror, many analysts are hopeful that the 2009 holidays will be a bit more joyous.

According to a survey by Information Resources Inc (IRI), roughly 77% of respondents said they're willing to splurge on a gift for the 2009 holidays even if times are tough. Based on its data, the market research firm stated that it's "conservatively optimistic" about holiday spending.

As a retail analyst, it's become depressing to watch over the sector in the past year. I know it's easy to wish for an industry-wide improvement. But to be frank, I just don't foresee recovery anytime soon -- at least not before the holidays are over. And I think investors should be prepared for another gloomy shopping season.

Right now, the economy is still in the beginning states of recuperating from a very traumatic recession. Consumer spending is usually one of the last pieces of the economy to recover. So consumers may respond to surveys saying the want to splurge and spend more. My question is whether that's really feasible.

Common sense suggests it's not: Unemployment is still rampant. Access to credit is being denied. Homes have been foreclosed upon. Home equity is nonexistent. And even the rich have been scarred from not being fully recovered from large market losses.

Without employment, credit, and a stable market, consumers simply cannot revive their ability to spend money. Therefore, I predict that we're going to see another very dismal holiday season as consumers continue to be stingy with their money.

From an investment standpoint, I'll be looking for companies that maintain lean inventory levels throughout the next few months and management teams that refrain from exerting optimism over the possibilities of this year's holiday sales. In the past, Costco (COST) and Nordstrom (JWN) have excelled at inventory management so I'll be watching to see if both can leverage their inventory systems to maintain proper inventory levels throughout the next few months.

Effectively managing inventory is vital for retailers to successfully survive sluggish holiday seasons. If you recall, last year most companies were stuck with excess merchandise and were forced to offer massive markdowns to lure customers into their stores. Desperation was written over every storefront window: Sears (SHLD) announced a list of 450 door-buster specials for Black Friday; Macy's (M) was running 50% off signs, plus an additional 20% well before the holiday shopping season was well under way; and even higher-end stores like Saks (SKS) slashed prices by as much as 75%.

This year will be no different. Consumers are still flocking toward discounts and bargains, which makes it tempting for retailers to implement markdowns once again. This tactic may help save face now, but it's detrimental to the future of retailers. I prefer to look at companies who focus on the long term and maintain higher price points to preserve brand value and margins, even if it drives sales lower in the near term. Thus, I'll be carefully watching to see which retailers are brave enough to avoid heavy promotional activity.

By keeping a close eye on the actions retailers take throughout the holiday season, investors can ready themselves to buy quality retail stocks at more attractive prices early next year, as valuations will likely come tumbling down as we pass through another Grinch-like Christmas.
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No positions in stocks mentioned.
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