Christmas Shopping: For Retailers, Down to Two Crucial Days

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Chris Hondros / Getty

Shoppers and pedestrians walk past an extrance to Macy's December 3, 2009 in New York City

In the face-off between retailers and tight-fisted shoppers this holiday season, the last two shopping days before Christmas will be even more crucial than usual. Retailing experts expect to see deep discounts to woo the last-minute crowds, but not the complete capitulation that some shoppers had been hoping — and holding out — for.

Up until now, retailers have managed to avoid the panic discounting that plagued last year's Christmas season, mainly because many ordered up to 20% less inventory in anticipation of fewer customers. But with sales even more sluggish than projected and consumers keeping their pocketbooks closed longer, experts believe shop owners will slash prices sharply in the final two days.

"Last year was the worst Christmas in 40 years and we're tracking below that right now," says Howard Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking firm.. "The whole [holiday season] will be determined by the last two days before Christmas."

However, analysts believe the big 70% markdowns are more likely to be strategically slapped on certain items rather than spread store-wide as they were last year. "We're definitely expecting to see a lot of promotions in the days before Christmas, but we are not likely to see the blanket discounts and markdowns that we saw a year ago," says Ellen Davis, a spokesperson for the National Retail Federation. "You probably won't walk into a store and see signs for 60%, 70% or 80% off everything."

Most retailers, anticipating a weaker holiday season, took steps to soften the potential blow by ordering less inventory, adding lower-priced merchandise to the mix, putting expansion plans on hold, shuttering weak stores, and purchasing items at better prices. As a result, most aren't under the gun to clear inventory with huge unplanned markdowns.

Nevertheless, many shoppers have been procrastinating in the hopes of scoring lalst-minute gifts at bargain-basement prices. As of mid-December, the average consumer had completed only 46.7% of their holiday shopping, according to a survey conducted by BIGresearch for the National Retail Federation. This was down considerably from the 54% who had finished their gift-buying at the same time in 2005 through 2007, says Kathy Grannis, a spokesman for the NRF. According to the survey, about 42 million people, or 19.1%, had not even started their shopping as of Dec. 16 while only 8.6% had finished it.

"We have heard all season that people are only buying items that are on sale and we think people are still holding out to get the best deal possible," says Grannis. "There could be great deals, but they're not going to be the 70% [across the board sales] that they saw at this time last year."

Sheila Rose, a 50-year-old mother of two in Stamford, Conn., is typical of shoppers who have been sitting on their hands waiting for the final markdowns. With unemployment hitting a 25-year high, she expects discounts to at least match last year's levels, "or maybe even more given the situation." Says Rose: "I think there will be some real hidden gems there towards the end."

In general, retailers that have focused on value, such as TJ Maxx, Kohl's Corp., Aeropostale, Children's Place, the Gap and Old Navy, have fared the best this holiday season and will likely resort to shallower discounts in the last two shopping days, says Jaffe. Best Buy, J. Crew and UrbanOutfitters have also performed well and are therefore unlikely to stray beyond planned promotions this week, he says.

However, department stores, such as Macy's, Dillard's, Bon-Ton Stores, JC Penney, Neiman Marcus, Nordstrom and Saks, will likely be squeezed to bring in the biggest markdowns as these retailers typically rely on the holiday season to generate between 45% and 50% of their operating profits, says Karen Ghaffari, a managing director at Fitch Ratings.

Heavy storms that swept across the Northeast over the weekend heightened the tension, dampening sales on the critical last Saturday before Christmas. That has added to pressure on department store retailers to make unplanned markdowns on select items in the final days, says Matthew Katz, a managing director at AlixPartners, a business advisory firm. Katz notes that many retailers launched aggressive TV ads in the past few days. "That's an indication there's a little bit of tension and nervousness," he says.