As wallets slam shut, retailers fear the worst
NEW YORK - Americans have slammed their wallets shut, and the future is looking downright scary for retailers across the country and for the whole US economy.
Yesterday, Best Buy Co. slashed its earnings forecast and said the changes in consumer behavior have been nothing less than "seismic," creating "the most difficult climate" the company has seen in its 42-year history.
And Macy's Inc., which turned a profit in the third quarter of last year but swung to a loss this time, warned that the upcoming holiday season would be "a nail-biter." It has slashed its budget for 2009 capital expenditures by almost half.
Shoppers from the well-heeled to the low-income have cut back as they worry about shriveling retirement funds and job security. The changes could tilt the economy into a deeper, more painful recession.
The downbeat forecasts from retailers came two days after Circuit City Stores Inc. filed for bankruptcy protection. It's also laying off thousands of workers and closing 20 percent of its stores.
Analysts believe consumers - who usually account for about 70 percent of economic activity - will no longer be the key driver of the economy, said Scott Hoyt, senior director of consumer economics at Moody's Economy.com.
"This is the end of the consumer-based economy," said Peter Schiff, who runs the investment firm Euro Pacific Capital Inc. in Darien, Conn. "Americans have been buying too much stuff, and now the epic shopping spree is over. It is a permanent change."
For years, consumers tapped into inflated home equity and used credit cards to finance their spending. Now those spigots are being shut off, and job losses are mounting.
Even when home prices recover and credit becomes more available, Hoyt said, Americans will have learned something: "They can't count on asset appreciation to meet their long-term goals."
If consumer spending can't lead the economy out of its deepening funk, what can? Even receding gas prices haven't provided a boost to shoppers.
The recent data have been startling: For the third quarter, consumer spending fell 3.1 percent, the worst performance in 28 years. Sales at established stores for October were the worst since at least 1969. The slump is continuing: Macy's expects a decline of at least 10 percent this month.
Among the hardest hit are luxury stores. Saks Inc. and Nordstrom Inc. reported same-store sales fell at least 10 percent. At Neiman Marcus Group Inc., the drop was nearly 27 percent.
Some stores make as much as 40 percent of their yearly profits during the holiday season, and the outlook for this holiday season is growing darker. For toy merchants, that figure is up to 50 percent. That could mean more bankruptcies in the new year.
Stores have been cutting prices far earlier than usual to try to save the season. Many have pushed up sales typically reserved for the day after Thanksgiving.
Best Buy's outlook shook Wall Street analysts, who thought it was well-placed to benefit from Circuit City's woes.
"As bad as things are, it was a shock to the retailing world as well as to the consumer spending outlook," said Ken Perkins, of RetailMetrics LLC. "Best Buy has always been the holiday destination. That announcement scared me." 