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Economy points to ho-hum holiday

The Baltimore Sun

At Hampden's trendy Double Dutch clothing boutique, shoppers are buying more from the sale rack and making fewer impulse purchases. At Chesapeake Wine Co. in Canton, they're choosing cheaper bottles of wine.

And at the Cupcake clothing boutique in Fells Point, the owners are ordering less inventory and subleasing some space to offset what they expect to be flat sales this year.

"People are very scared," Emily Levitas, owner of Gotta Have Bags in Hampden, said about shoppers.

As the national economic uncertainty leads customers to curb spending, retailers are facing the worst economic climate in years - and a gloomy forecast for the holiday season.

The nation's largest retailers are adjusting by offering steep discounts and promotions to clean out full racks of fall items that have been slow to sell.

Wal-Mart Stores Inc. is starting holiday sales this week, a week earlier than last year. Banana Republic recently had a 30-percent-off sale on all merchandise at its stores, and Restoration Hardware e-mailed $100 discount coupons for purchases of $400 or more. Neiman Marcus is sending out gift cards valued at $50 to $100 to lure shoppers into stores, showing that wealthy shoppers normally immune to early declines in the economy are also feeling pinched.

Locally, retailers are cutting prices and doing more promotions to compete for the dollars of cash-strapped shoppers. And they're scrutinizing their own spending.

The distressed economy has already sent some retailers, including Sharper Image and Boscov's, into bankruptcy.

Spending could decline even further as the problems on Wall Street continue and layoffs increase, analysts say.

Many consumers dealing with higher gas and food prices - and tighter credit - are reluctant or unable to spend.

Meanwhile, banks are starting to reduce limits and raise interest rates on the credit lines that retailers use to buy inventory and pay salaries, causing further trouble in the industry.

The National Retail Federation says the holiday season, when most retailers ring up the bulk of their sales for the year, will be the worst since 2002. The trade group predicts that holiday sales will increase 2.2 percent to $470 billion, well below the 10-year average increase of 4.4 percent, and the slowest growth since 2002, when sales rose 1.3 percent.

"It's going to be a very challenging holiday season for the retail industry," said federation spokesman Scott Krugman.

"Retailers are going to have to be very aggressive on price and create more of an emotional connection with their brands."

Wal-Mart Stores Inc. is starting holiday sales by slashing the prices on popular toys. KB Toys also recently said it was cutting prices on more than 200 toys to $10 or less to "allow consumers to stretch their dollar in these challenging economic times."

"We hear [consumers] are nervous about the economy," said Wal-Mart spokeswoman E.R. Anderson. "They're shopping earlier, spending less and buying less expensive items."

That's why the sale rack has become so popular at Double Dutch. The owners expect flat sales this year, something they say they're happy with, given the economy.

"I think [shoppers] are coming with an intent for what they need, as opposed to: 'I'm going to look around and just get what I want,' " said Megan Luther, co-owner of Double Dutch. She has also noticed that shoppers are using more cash and debit cards instead of credit.

Annabelle MacNeal, a stylist browsing the racks at Double Dutch recently, said she's shopping more at thrift and second-hand stores. But she still likes to window shop and will buy something if it's good quality.

She avoids stores selling cheaper fashions that might not last as long.

Carey Williams, 27, of Hampden, was shopping at Double Dutch for a birthday present for herself. She said the economic slowdown hasn't affected her paycheck.

But she knows friends who have been laid off, and that's making her spend less.

"I'm definitely buying cheaper clothes," she said.

Retail experts said psychology is affecting shoppers as much as real-life financial problems.

"I suspect a larger percentage of [consumers] will be more careful than they might otherwise be as a result of the fear-mongering," said Douglas Ober, a money manager and chairman and chief executive of closed-end mutual funds Adam's Express Co. and Petroleum & Resources Corp. in Baltimore.

Retailers are finding ways to adapt to the change in shopping patterns.

Cupcake owner Lisa Schatz had sales increases of 20 percent in some months last year, but sales are flat this year. She cut back on inventory and is paying attention to what shoppers want, such as dresses for special occasions. She's also renting space to a hat retailer.

"In times like this, you have to have product that people must have," said Schatz, a former executive at the much larger clothing retailer White House Black Market. "Overall we're seeing flat growth, but I've been around long enough to know how to manipulate inventory to make sure you stay profitable."

Schatz expects to discount merchandise during the holiday season to compete with other retailers doing the same thing.

Mitchell Pressman, the owner of Chesapeake Wine, remembers another financial squeeze during the bust from 2000 to 2002. At the time, Canton was rich in technology companies, but many went out of business. He said his strategy is to cut back on some inventory and focus on less-expensive wines.

"Having lived in business through a few other recessions, what I don't want to do is overreact," Pressman said. "Most of the people we are selling to are affected by the economy but not desperate. People are watching their budget, but they're still consuming."

Pressman doesn't use revolving credit to buy inventory and to help keep the business going. He spends only what he brings in.

But a study by accounting and consulting company BDO Seidman, LLP, found that 41 percent of chief financial officers at U.S. retailers have experienced a tightening of credit by their lenders. More than a third said they were reducing planned inventory purchases for the year because of it. Some may have to lay off workers because of the problem, the study found.

"Banks are getting more conservative, and at the same time you've got consumer-based businesses like retailers suffering because consumers aren't spending as much," said Doug Hart, a partner in the retail and consumer products division at BDO.

He doesn't expect consumers to notice the difference during the holiday season.

"Is that something consumers will see in stores - empty shelves?" asked Hart. "No. The last thing retailers want to do is make stores look understocked and understaffed during the holiday season, because that is the most promising selling time for them."

SmartReply, which provides mobile marketing and advertising services to retailers, said its clients are also considering cutting inventory purchases but haven't yet felt the credit squeeze.

He said retailers hope the federal government's bailout of financial institutions will help improve the economy.

"Retailers are embarking on solid strategies to attract customers and retain the ones they have, and consumers will hopefully be buoyed by both the presidential election and a resolution on Wall Street," said Mike Romano, executive vice president of SmartReply.

Gotta Have Bags in Hampden had a steady stream of shoppers one recent afternoon. But owner Levitas still worries about a sales decline this year.

She has already noticed shoppers are looking to spend less.

Levitas, who doesn't use revolving credit, has been adjusting her spending so it's in balance with sales volume.

She hopes her reputation will help her survive these tough times.

"We'll get through this," she said. "I'm very optimistic."

frosty forecast

Holiday retail sales this year are expected to rise 2.2 percent. That would be half the average yearly increase from 1998-2007 and the slowest pace in six years.

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