December is a critical month for retailers - the holiday season is the busiest shopping time, and a large chunk of bottom-line profits is booked in the final month of the calendar year. In 2006, December sales accounted for about 15% of all sales for the retailing sector. But December 2007, as many were predicting, may be one of the worst Decembers this decade. Tomorrow, same-store sales for this critical month will hit the Street and the International Council of Shopping Centers (ICSC) is expecting an overall gain of 1% among stores open at least a year. This is below the ICSC's earlier estimate of 1.5% and compares to a year-ago jump of 3.3%. If this estimate is on the nose, it will be the sector's worst December since 2002.
There are many reasons that the holiday-shopping season was a slow one: rising food and fuel costs, the credit market breakdown, continued housing woes. And because of all these reasons, many retailers were forced to offer sale prices and additional incentives to lure cautious customers into the stores. These discounts obviously pressured the bottom line.
Things may get worse before they get better, according to Lehman Brothers analyst Jeff Black, who spoke to MarketWatch earlier today. "We continue to believe that retail earnings foretell a recession in 2008 and that, at a minimum, [first half of 2008] estimates are too high [...] December's retail stocks are starting to bake in bleak scenarios for 2008."
The one bright spot to all of this disappointment is that it was largely expected. Sales numbers from the first part of the month were pointing toward trouble, so analysts and investors have had some time to wrap their collective heads around the notion that a robust holiday shopping season wasn't in the cards. And some companies, such as Bed Bath & Beyond (NASDAQ: BBBY), Target (NYSE: TGT) and Talbots (NYSE: TLB) have already issued earnings or sales warnings. So while retail may see some selling pressure tomorrow, it may not be an all-out plunge, as investors have been duly warned.
Beth Gaston Moon is an analyst at Schaeffer's Investment Research.
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