The perfect storm for an imperfect holiday season!

Implications: With oil prices inching towards north of $100/barrel, housing starts and home resale’s yet to reach their nadir, the spiraling down of the US dollar, the sub prime mortgage debacle hitting blue chips like Citigroup and other industry stalwarts the American consumer will catch cold in their consumer confidence in the next few weeks.

Analysis:  

If one examines all the retail P&L statements of the retailers, you will see inventories and on order in some cases almost double than those of last year. This is a result of the retailers experiencing a strong BTS season which gave them the façade of a looming strong holiday season. All indicators led the retailers to believe their assortments were right on inclusive of Kohl’s, Target and other leaders. These companies did an outstanding job of developing, implementing and executing strong strategies which all may be for not.

Today (11/6/2007) Morgan Stanley came out with their new forecasts for the retailing sector and the prognostications were bleak. It would not have been surprising to see M and SHLD and the other companies that are still in reorganization mode to be forecasting sales and margins down but with Kohl’s, Target, J.C. Penney’s and Nordstrom’s also being downgraded the season looks bleak.

The consumer in the short run will do fine as the price wars have begun. The slashing of Consumer Electronics, Toys and other “packaged goods” is already fierce. Top line sales should be o.k. if not strong but the margins are going to take a big hit! As for apparel, which is some what more blind price discounting has been running since prior to Columbus Day.

All the Markdown optimization software and other new efficiencies will not be able to allow the retailers to clear their inventories profitably by December 26^th. The math does not work and margin erosion will be the worse the industry has seen in years.

To make matters worse, the shift to the direct E - tail channel of distribution is proving troublesome for many retailers. The fill rates projected are all over the map as the companies are experiencing shipping and warehousing issues that are inherent with any new dynamic.

The consumer will pick up the “early bird” deals and keep their “powder dry” waiting for the retailers to continue slashing prices. The smart consumers will be giving each other cash or gift cards so they can pick up the bargains after the smoke clears in the weeks following the holidays.

The last and very telling indicator is that the luxury brands are running tepid from Tiffany’s; L.V.M.H. and Coach who have always been pretty much macro economic proof.