Weak Back-to-School Sales Spell Trouble for Holidays

By ELIZABETH HOLMES and ANN ZIMMERMAN Shoppers are focusing on deals and limiting buying mainly to necessities, based on August sales estimates that herald another tough holiday season for beleaguered retailers. Despite sales tax holidays in several states designed to spur sales, back-to-school spending remains lackluster, according to industry experts. Retailers' recent efforts to shake customers from deep discounts and spur buying by tightly controlling inventories are fizzling. Specialty clothing store sales fell in August, an indicator of the poor results expected Thursday when retailers report their back-to-school sales. Continued weak demand is raising new worries about the retail outlook for Christmas. Shoppers cruise a Littleton, Colo., Target store last month. Now, retailers that traditionally rely on back-to-school sales as an barometer of demand for the remainder of the year face tough choices on stocking and hiring. Customers should find ever slimmer pickings and fewer clerks as stores hold off on early holiday orders and further trim costs. On Thursday, big chain stores are expected to report August sales results showing a 3.6% decrease from a year ago in sales at stores open at least a year, according to research firm Retail Metrics Inc., which aggregates data from analysts. Thomson Reuters estimates sales fell 3.8%, using a slightly different methodology. The decrease in this closely watched measure of retailers' health would be the 12th consecutive month of sales declines. Store executives said they are going into the season with less inventory, decreasing the breadth and depth of their assortments. They hope to avoid the discounting bloodbath that marked last year's holiday. Many clothing stores, for example, now carry fewer styles, and fewer sizes and colors. Target Corp. recently said its fourth-quarter orders "are not based on any expected improvement in our sales trends." Gap Inc., one of largest apparel retailers by revenue, said its inventory for the third quarter would be down in the "high single digits" while luxury-goods retailer Saks Inc. said inventory levels would be down in the "low to mid-teen" percentage range for the second half of the year. Perry Fox, a vice president of a Hitachi Ltd. unit that sells computer storage, said he is expecting this Christmas to be worse than last, even though his business should benefit from consumers buying upgrades in lieu of new computers. "This year, the reality of the recession has hit home, and people are going to be a lot more careful," Mr. Fox said. Some companies are hedging their bets with ways to quickly restock shelves if shoppers show interest in a specific product. Gap, for instance, maintained a stock of fabric used in a new premium denim line, which hit stores in August, allowing it to quickly fulfill reorders when smaller sizes of the dark jeans sold more quickly than expected. Mastercard Advisors' SpendingPulse data to be released Wednesday found that sales of clothing at specialty stores, across all payment types, fell 6.6% in August compared with a year earlier. The decline is less severe than July and June, when sales fell 9% and 12%, respectively, over the prior year periods. August sales, which lean heavily toward apparel and school supplies, were affected by a late Labor Day holiday that pushed back some school and college openings, and by increased spending on new cars triggered by the "cash for clunkers" government rebates, analysts said. Retail Metrics estimates teen retailers were the worst performers last month, with a 7.8% decline from a year ago. "You take a look at the prices to see if you need it," said Matt Curran, an elementary school principal from Westchester County, N.Y. Mr. Curran and his wife, Sue, said they were more "conscious" of their purchases for their two children. Instead of buying two dozen pencils for a son entering sixth grade, Ms. Curran said she's going to scrounge up that many from their house. The decreased willingness to spend on back-to-school items could have ramifications for the economy as retailers cut back on holiday and part-time workers. In past years, chains would typically have seasonal hiring plans in place by now, said Craig Rowley, vice president of global retail for the Hay Group, a human resources consulting firm that conducts a yearly holiday hiring survey. "This year they are going slowly," Mr. Rowley said. "They just flat out don't know how many people they are going to need," he said. Retailers and manufactures worried about being caught short are devising procedures to speed extra merchandise to market if needed -- and to quickly find a new home for it if not. Electronics makers are building more "vanilla" versions than before, said Lorcan Sheehan, a vice president at ModusLink Global Solutions, a global supply chain adviser. That way, if a retailer such as Target suddenly wants fewer digital cameras, the rest can be more easily repackaged and sold to another retailer elsewhere in the world. The result for consumers will be more of the same merchandise across many competing stores. —Miguel Bustillo contributed to this article. Write to Elizabeth Holmes at elizabeth.holmes@wsj.com and Ann Zimmerman at ann.zimmerman@wsj.com