Jittery Shoppers Dim Stores' Hopes

Typically retail sales will move in tandem with consumer optimism - although not necessarily each and every month.

By MIGUEL BUSTILLO, SARA MURRAY And RACHEL DODES

Americans show little sign of regaining the confidence that once made them world-champion shoppers, and that caution has retailers leery about the prospects for the economy in 2010.

 

Major retailers, including Home Depot, say consumer spending will remain subdued this year due to high unemployment and weak housing prices.

Several top store chains this week reported stronger results and lingering doubts. On Tuesday, Target Corp., Home Depot Inc. and Macy's Inc. joined a parade of consumer-focused companies in warning that sales gains will continue to be slow, especially in the year's first half.

Consumers remain reluctant to open their wallets with unemployment stubbornly high and home prices falling and unlikely to turn up soon, executives and economists say. While business purchases and other indicators point to an improving economy, unemployment is now at 9.7% and expected to fall only gradually over the next two years.

"The economy is not out of the woods yet," said Carol Tomé, chief financial officer of Home Depot, which Tuesday forecast a 2.5% rise in 2010 sales despite posting its first quarterly gain in sales at stores open at least a year in four years. "It's going to be flattish in the first half of this year as this economy continues coming out of the doldrums," she said.

New evidence that shoppers' spirits—and spending—are depressed came Tuesday when the Conference Board said its consumer-confidence index fell to 46.0 in February, from 56.5 a month earlier, its lowest point in 10 months. Consumers' views of current economic conditions also fell, as did their expectations of where the economy is headed.

Stocks fell, as investors sold in response to the plunge in consumer-confidence data, interpreting the drop as a sign of a still fragile economy. The Dow Jones Industrial Average fell 100.97 points, or 1%, to 10282.41, while the S&P 500 fell 13.41 points, or 1.2%, to 1094.6.

"In terms of consumer spending, it's not really a strong recovery," said Brian Bethune, an IHS Global Insight economist, adding, "We continue to set ourselves up for disappointment."

Matthew Simon has always been frugal, but the 34-year-old says the recession reinforced that tendency. Even as he moved up in his career in procurement and engineering, Mr. Simon says he didn't indulge in extra purchases during the recession. Instead, he saved more and increased his charitable donations.

"I think it's even more critical when your means expand to be even more...vigilant about how the money is spent," said Mr. Simon, a Williamstown, N.J., resident.

America's patchy rebound is mirrored in Europe, where recovery has been fitful, and concerns are mounting that the Continent is struggling to muster growth even with significant stimulus. New data Tuesday underscored Europe's tenuous steps to recovery, with consumer spending falling in France in January, and Italian consumer confidence sliding this month.

Consumer spending pressures Tuesday even weighed down Latin America's biggest economy, which has a relatively robust economic recovery. Brazil's retail sales slipped 0.4% in December compared to November. Its 9.1% year-on-year sales growth, while enormous by current American standards, still fell short of expectations.

In the U.S., homeowners continue to suffer from declining home values, though the picture is gradually getting better. The national S&P/Case-Shiller home price index fell 2.5% in the fourth quarter of 2009 compared with the year-earlier 18.2% plunge over 2007.

Still, nearly one in four U.S. homeowners with a mortgage owed more than their homes were worth at the end of 2009, according to First American CoreLogic Inc., a California real-estate information company. The numbers highlight the challenges facing any sustained recovery in consumer spending and housing.

While retail executives expect challenging conditions, particularly in their fiscal first quarters, some say they are hoping that Washington will take measures that put more Americans to work, and expect action before midterm elections in November. The Senate is expected to take up a $15 billion jobs measure this week, and Democrats believe they have sufficient votes for passage.

"Hiring hasn't really kicked back in, and the fact is that home prices have not really stopped declining yet," Lowe's Cos. Chief Executive Robert Niblock said in an interview. "Congress will have to do something before having to face elections."

Some of retailers' wariness is lingering shock from the upheaval of 2008, when major chain stores were caught off guard by plummeting consumer spending and drastically marked down merchandise to clear inventories, hurting profits.

Retailers are still managing conservatively, tightening costs and inventory levels to minimize risk, instead of pursuing rapid sales growth—a contrast from the go-go atmosphere of the last decade, when executives trumpeted aggressive U.S. store expansion as proof of their financial muscle.

Few chains are adding significant stores in 2010. Home Depot plans just one new U.S. location, meaning that commercial landlords likely won't see a pickup in leasing anytime soon.

"The world has changed; it's a very different retail environment," said Madison Riley, managing director of retail consultancy Kurt Salmon & Associates. "These companies were burned big-time when the economy crashed, and while margins improved greatly in recent months, it's going to take some time before they get comfortable doubling down again."

Compounding retailers' caution is mounting evidence that consumers' frugality may be lasting. A survey by Booz & Company set to be released Wednesday found that the recession had reshaped consumer consumption in permanent ways. Only 18% of consumers said they planned to spend on clothing and shoes at pre-recession levels in the next 12 months. Two-thirds said they would now go to other stores for lower prices, even if the stores were less convenient places for them to shop.

Jennifer McCormick, a 29-year-old hardware-store manager in Lawton, Mich., recently bought a new house with her husband, but has been putting off big purchases, including a dream $2,500 sectional couch with built-in massagers.

Although business at the store has improved, "I personally am just cautious," she said. "With everyday expenses with the baby and daycare it's, 'Let's wait and see what we can afford.' " Instead of stretching herself financially, she plans to save over the next six months in hopes of feeling comfortable enough to buy her prized sofa. Still, some companies saw glimmers of hope.

Target, which posted its first quarterly same-store sales increase in two years, said it was seeing customers slowly return to discretionary purchases such as clothes and home furniture.

"We are very mindful of the challenging macroeconomic environment, unemployment in particular," Target Chief Financial Officer Douglas Scovanner said. "But in light of where we've been, we feel very good about where things are going."

The long-battered department-store sector began showing improvement, with J.C. Penney Co., Nordstrom Inc. and Macy's reversing some of the margin erosion that ate into their profits in 2008.

Macy's Chief Executive Terry J. Lundgren said after reporting that the company swung to a fourth-quarter profit, he expected to see home categories improve as housing slowly rebounded.

"While housing prices will likely remain depressed, they are beginning to turn over," said Mr. Lundgren. "As people buy new homes...the natural follow-up is to update and upgrade."

Penney executives forecast a return to low single-digit same-store sales gains in 2010 following two years of declines, but attribute the outlook to internal initiatives, such as improved merchandise selections. "We are not counting on the consumer to feel a lot better about their own situation," said Chief Executive Myron E. Ullman III.

At Nordstrom Inc., profit more than doubled in the fourth quarter, yet it forecast a modest, 2% to 4% increase in same-store sales this year. "Customers remain cautious," said Nordstrom co-president Blake Nordstrom. "Our biggest opportunity is improving our execution."
 
—Nick Timiraos and Brenda Cronin contributed to this article.
Write to Miguel Bustillo at miguel.bustillo@wsj.com, Sara Murray at sara.murray@wsj.com and Rachel Dodes at rachel.dodes@wsj.com