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Skittish consumers have retailers on guard

Kevork Djansezian/ Getty Images/Kevork Djansezian/ Getty Images

Retailers are heading into the crucial back-to-school and holiday seasons amid growing economic uncertainty and signs that consumers are holding back.

"The customer's under pressure," summed up Thomas Schoewe, an executive-vice-president at Wal-Mart Stores Inc. , where second-quarter sales in Canada were flat and, in the United States, dropped 1.8 per cent at stores open a year or more.

While major retailers such as Wal-Mart, the world's largest merchant, and Home Depot Inc. beat analysts' profit expectations, companies warned of a skittish consumer who is looking for bargains and delaying shopping until the last minute, including for back-to-school items. Home Depot was among retailers to reduce its sales outlook.

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Consumer confidence is a key to the recovery: Consumer spending makes up about 70 per cent of the U.S. economy and 60 per cent of Canadian economic activity.

"I wouldn't say that it's a robust trend," said Wayne Hood, retail analyst at Bank of Montreal. "It points to a consumer who is very guarded about loosening their purse strings."

For retailers betting on a more bullish consumer, the uncertainty could be bad news. Merchants don't want a repeat of the disastrous holiday season of 2008, when they struggled with too much inventory as consumers scaled back spending in the downturn. Stores were forced to clear out merchandise at steep discounts, which shaved profits.

Some retailers, including teen clothier Abercrombie & Fitch Co. have been building up inventories in anticipation of a more upbeat mood. At the beginning of the year, chains were sometimes caught with not enough merchandise when consumers stepped up spending. But now their sentiment seems to be shifting amid a gloomier global economy.

Mr. Hood said that the coming weeks will be critical in signalling whether stores are overstocked. Still, some retailers, including TJX Cos. Inc., which runs discounters Winners and Home Sense in Canada, have already cut inventory to minimize markdowns. TJX said its merchandise level dropped 13 per cent in the past quarter.

Amid the doubt, other retailers are moving to close underperforming stores. On Tuesday, Saks Inc. said it was shutting some Saks Fifth Avenue stores, bringing to five the number of closings so far this year. It may close more, Saks chief executive officer Stephen Sadove said. It also plans to open a few of its lower-priced OFF 5th outlets annually in the next few years. "We believe that economic recovery will be slow and fragile with potential periods of increased volatility," he said.

Abercrombie & Fitch said it is set to close 60 U.S. stores later this fiscal year and cut its international growth plans for its Hollister chain by 20 per cent.

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Sears Canada and Canadian Tire Corp. continue to trumpet promotions to lure customers. Sears, for example, is touting its financing terms for cost-conscious customers, including zero interest and payment deferral for up to 36 months.

Sears on Tuesday reported a weak second quarter with sales down 2.4 per cent at stores open a year or more. "Our results reflect a continuing downward trend in consumer confidence caused by high unemployment and other factors," said Dene Rogers, chief executive officer at Sears Canada.

Yet retailers are struggling to figure out how best to attract skittish customers. Wal-Mart is moving to reverse its recent initiative of slashing prices as it moves back to its "every day low price" strategy of keeping prices at more steady levels.

"We had some very, very aggressive rollbacks that were in place until the early July time period," Mr. Schoewe said. "When we saw that those were not driving the traffic and the gross profit dollars we anticipated, we pulled back a little on those rollbacks."

Consumers remain squeezed, tending to spend more when they cash their paycheques and less as the money dries up, he said. The retailer has also observed higher use of debit cards financed by food stamp and other government programs.

"It's going to be a while before we see some improvement," he said.

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About the Author
Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More

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