Consumers Could Go Either Way In 2007

After consumers showed some financial strain this year amid a slowing housing market, they're expected to pull back more in 2007. The question is how much will they retrench given a murky economic outlook.

Shoppers already have cut back on home furnishings and big-ticket items like washing machines, hurting furniture stores and home improvement chains like Home Depot Inc. and Lowe's Cos.

What's keeping consumer spending healthy is a steady job market and wage growth, which have offset rising gasoline prices earlier in the year. But that bottom could fall out if the housing market slumps even more, triggering massive layoffs, analysts said. High-profile layoffs in the auto industry and steep cutbacks in home building further weakened consumer confidence in November, despite a healthy job picture painted by government statistics, according to the latest report from the Conference Board.

"The economy looks to be at an inflection point. It could go in either direction," said Ken Perkins, president of RetailMetrics LLC, a research company in Swampscott, Mass. "If housing prices further deteriorate, consumer confidence will go with it, and spending will go down further. I think consumers are going to take a breather after the holidays."

Shoppers are already being cautious this holiday season, despite a decline in gasoline prices since August. While many malls and stores reported a strong turnout for Black Friday, business was spurred by the bargain-hungry crowds that came out for the early morning specials but left once the deals dissipated. And recent reports show that holiday shoppers will be waiting longer this year for the deepest discounts.

A disappointing November led the International Council of Shopping Centers to pare its same-store sales growth forecast for the November-December period to a range of 2.5 percent to 3 percent, down from 3 percent. Same-store sales, or sales at stores opened at least a year, are the industry's standard for measuring a retailer's health.

ICSC predicts same-store sales growth should slow to 3 percent for 2007 from a projected 3.6 percent this year.

Richard Hastings, a retail analyst at Bernard Sands LLC, views the consumer spending outlook next year as "unfavorable," but noted that "the wealthier households could make up the difference for the weakness in the lower household incomes."

High-profile job cuts have focused on the auto and other manufacturing industries, hurting lower-income shoppers. Meanwhile, wealthy shoppers are benefiting from a rebound in the stock market and big holiday bonuses on Wall Street.

The divide between the haves and have-nots is evident in the difference between the robust performances of luxury stores and the mixed results from discounters — and could run deeper next year, analysts said.

High-end stores like Saks Fifth Avenue and Nordstrom Inc. so far have had strong holiday sales, and analysts expect wealthy shoppers to show no signs of cutting back on Gucci handbags and the like next year.

Meanwhile, the overall department store industry should continue to see improved performance, helped by continued consolidation, which will weed out poor-performing stores, and better fashions. A big turning point was Federated Department Stores Inc.'s acquisition last year of May Department Stores Co., creating a company with huge merchandising power.

But a cloudier picture emerges when studying the world's largest retailer Wal-Mart Stores Inc. and rival Target Corp.

Last month, Wal-Mart posted its first same-store sales decline in a decade and warned that same-store sales would be up no more than 1 percent in the current month. The discounter has been facing its own internal issues; in particular, it is struggling with an upscale merchandise strategy that hasn't taken hold yet. But some analysts believe that Wal-Mart's sluggish performance is also due to the financial woes of its core customers.

According to recent surveys conducted by BIGresearch for the National Retail Federation, only 28 percent of Wal-Mart's shoppers polled said that fluctuating gas prices have had no major impact on their spending.

Prices at the pump are now 3.8 cents higher than a year ago but 80 cents a gallon lower since the start of August, according to the federal Energy Information Administration.

Meanwhile, Target posted better-than-expected results in November and offered an upbeat outlook as it takes market share away from Wal-Mart.

Analysts will be closely watching how Wal-Mart performs next year. While Wal-Mart has its own unique problems as some shoppers are bypassing the discounter for Target and other rivals, the industry's health depends on a vibrant Wal-Mart because of its sheer size.

"Wal-Mart is a proxy of the overall retail industry," Perkins said. "It's going to be a closely watched retailer in 2007."