For Retailers, More Winners Than Losers This Holiday Season

From rebates and layaways to low-price guarantees, retailers are pulling out all the stops this holiday season to entice shoppers, who are keeping a tighter reign on their spending.

Those who track the industry, however, say it may be too little too late in what is shaping up to be the worst holiday sales seasons since the recession of 1991.

Rogelio V. Solis / AP Shoppers get in line outside of a Best Buy store.

"It’s a very promotional holiday season, particularly since it’s a shorter shopping season than usual with Thanksgiving falling so late, so retailers are going to be quick to cut prices and get their promotions out there to attract what little shopping is going on,” says Frank Badillo, senior economist for TNS Retail Forward, a market research and consulting firm in Columbus, Ohio. “But it’s going to be challenging for every retail category across the board this year.”

Sales and spending forecasts are mixed, with some calling for modest increases, others are actually predicting a decline—no small matter for retailers, which derive between 20 percent and 40 percent of total annual sales during the November-January shopping season.

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Though no one is predicting blockbuster sales in any category this year, some stores will fare better than others. Here’s a look at the expected winners and losers.

Winners

Discount vendors are well positioned to take their place in the winner’s circle, notes Kimberly Picciola, lead retail analyst for Chicago-based mutual fund tracker Morningstar.

“There’s going to be weakness all around, but stores that focus on popular gift items and competitive prices are going to hold up better,” she says. “Consumers are going to be very price sensitive.”

The value category includes deep discount grocery stores such as ALDI, a privately held German chain that is taking root in the U.S., Save-A-Lot Food Stores in St. Louis, Mo., a subsidiary of SUPERVALU and privately held Trader Joe’s, a specialty grocer in Monrovia, Calif. that focuses on organic products.

“People have to eat, but they’re increasingly looking to save some money on the basics,” says Badillo.

Discount vendors, of course, also include off-priced clothing stores such as TJ Maxx and Marshall’s, both owned by The TJX Companies , Ross Dress for Less and Burlington Coat Factory, owned by Burlington Coat Factory Warehouse.

“We’re seeing quite a pull-back from high-end consumers who tend to be more cautious in times when the stock market is not performing well so I think we’ll continue to see some trading down to off-priced retailers,” says Picciola.

Big box discounters, meanwhile, including Wal-Mart Stores , KMart, a unit of Sears and Target will also continue to benefit from shoppers of all income levels seeking value and convenience.

"Super centers that offer a combination of discount department store products and grocery items, which are primarily operated by Wal-Mart and Target, are doing particularly well right now," says Badillo.

Michael Dwyer / AP Shoppers are seen outside BJ's Wholesale Club in Stoneham, Massachusetts.

Other retailers likely to do well include warehouse clubs, such as Costco Wholesale , SAM’S CLUB, a division of Wal-Mart, and BJ’s Wholesale Club , which target shoppers looking to stretch their food, apparel and appliance dollars.

Lastly, says Picciola, dollar store chains, including The Dollar Tree and Family Dollar Stores , are expected to attract both budget shoppers and middle-income bargain hunters, as they expand their offerings from toys, clothes and beauty products to housewares and refrigerated staples like milk and cheese.

Another possible bright spot for holiday sales this season includes consumer electronics.

TNS Retail Forward predicts stores that sell popular video gaming systems such as Nintendo's Wii, Sony's PlayStation and Microsoft's X-box 360 could enjoy 4 percent holiday sales growth in that segment.

TNS adds that sustained buying to prepare for the conversion to digital TV signals could make consumer electronics stores an even strong holiday performer than expected.

“We expect consumer electronics to be among the winners but it’s not necessarily going to help the [pure play] electronics stores, since many shoppers will just buy their Wiis from Wal-Mart,” says Badillo.

Indeed, earlier this month Circuit City filed for bankruptcy protection and Best Buy slashed its fiscal 2009 earnings forecast, which sent its shares tumbling.

Online stores, including Amazon.com and Buy.com, will also likely continue their ascent, with TNS Retail Forward projecting holiday sales will grow 9 percent. It’s worth noting that would be the first single-digit growth rate for online retailers during the holiday shopping season since 1999.

“Consumers will continue to use the Internet to comparison shop, find the best deals and take advantage of free shipping offers, but it’s really going to come down to price this year more than convenience,” says Kathy Grannis, a spokesperson for the National Retail Federation.

Losers

By far, the stores that will struggle most during late November and December include those related to home improvement.

Home Depot and Lowe’s Companies have suffered serious sales slumps amid the housing recession and mortgage market meltdown.

That trend may be exacerbated during the holiday sales season, analysts say, as banks slash spending limits on credit cards and reject more applicants for new cards. Big ticket home renovation projects are often financed using credit.

It’s not just the home improvement stores that are taking a hit, however.

Picciola says all businesses tied to housing sector, including home furnishings, have seen their sales plunge in 2008.

Williams-Sonoma , as well as its Pottery Barn subsidiary, and Pier 1 Imports have been struggling this year,” she says. “The home furnishings category is really out of favor.”

Shoppers at Macy's.

At the same time, high-end department stores, including Saks Fifth Avenue , Bloomingdale’s, a Macy’s subsidiary, and privately held Lord &Taylor and Neiman Marcus are also less relevant in a year when holiday shoppers are looking to spend less.

Those that are publicly traded have reported less than stellar same store sales so far this year, alongside the upscale shopping centers they anchor.

“Upscale department stores will be one of the hardest hit this holiday compared with last year,” says Badillo. “Clearly we are seeing upper income households being hit much harder this year [by the economic downturn], whereas last year those households were still holding up very well.”

That holds true for luxury grocery stores, too, including Whole Foods Market .

Lastly, higher gas prices and tighter credit restrictions will deliver a decidedly unmerry holiday sales season for U.S. auto makers, which will continue their downward spiral.

Consumers who might have considered surprising their sweetie with a new set of wheels, despite the market melee, will find it harder to qualify for loans, even if prices are better.

Analysts say they will also be leery of purchasing new cars or trucks from the cash strapped Big Three U.S. automakers General Motors , Ford and Chrysler, all of which are hitting taxpayers up for a piece of the federal bailout pie.

The stores may be a little less crowded this year, but Grannis says those that are able to compete on price, promote themselves effectively and stock the items on shopper’s must-have lists may just survive.

"Consumers are cutting back on non-essential items and discretionary purchases and are instead focused on more essential items like winter coats, gloves and even smaller affordable items for the home like candles and wall art," says Grannis. "They’re sprucing up their homes instead of traveling or investing in larger renovation projects. It’ll be challenging for all retailers, but those that are able to offer the products and types of discounts that consumers are looking for should come out ahead."

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