• by Jim Lucas , October 5, 2009

With holiday season just around the corner (seemingly three minutes after Halloween), what's the prognosis? There has been little agreement on the meaning of retail sales in August. Some analysts were mildly optimistic about the back-to-school sales declines, while others felt it was a harbinger of a poor holiday season. If sales are off again this holiday season, it will be the first time in 30 years of back-to-back sales declines.

Perhaps the biggest challenge has been trying to find new ways of talking about the current retail situation -- i.e., "uplifting decline," "improved negative growth," "not as bad as analysts thought," etc. Part of this stems from the recent news in joblessness and housing, which suggests that while things are not as bad as they were a few months ago, they're probably not yet on the plus side.

The most recent retail seasonal predictor -- back-to-school -- was not very encouraging. The Commerce Department reported that retail sales (excluding automotive) were up a modest 1.1%. Early results from the International Council of Shopping Centers (ICSC) and Goldman Sachs showed that August sales were down 2.1% compared to last year, and yet were "better than expected." ShopperTrak has reported declines in both back-to-school sales and store traffic in August.

Consumers seemed to be somewhat more pragmatic back-to-school shoppers this year, and appear to be limiting themselves to "necessities" -- evidenced in part by many of the more youth-oriented retail chains (e.g., Abercrombie & Fitch, American Apparel, Zumiez, and Wet Seal, Hot Topic, Children's Place and American Eagle Outfitters) -- which all experienced declines during back-to-school shopping.

This raises another important issue: Have shoppers changed their shopping behavior for good? As we see some of the "green shoots of recovery," will shoppers go back to their pre-recession ways, or have they turned over a new leaf? As a predictor of holiday sales, back-to-school suggests that holiday 2009 sales will be flat to slightly up; yet ShopperTrak's observations for the back-to-school time period suggest that holiday sales and traffic this year may be flat to down as shoppers continue their frugal ways.

Some interesting history is provided by what retailers said last year regarding when they thought the recovery was most likely to begin. BDO Seidman's survey of retail CMOs suggested that about a third -- 29% -- believed that we would experience an easing or start of recovery in the third quarter; 17% felt it would be the fourth quarter of 2009. Another 19% felt the turnaround would only come in 2010.

Based on all of these inputs, here are some forecasts for Holiday 2009:

• Overall retail sales will be down slightly: flat to slightly up 1-2%. As shoppers have made most of their adjustments already, don't expect to see as large a decline in sales as last holiday season.

• Online will continue to experience strong growth.

• Mass retailers (Wal-Mart, Target and Kmart) are well-poised for flat to positive traffic and sales.

• Consumer electronics will do well, but the players will be different -- not only because of the departure of Circuit City, but the focus on consumer electronics as a "win" category by Wal-Mart.

• Department stores will continue to struggle as shoppers reduce the number of trips and amount spent, and trade down retail.

• Drug stores will experience increases as a result of two trends: increased DIY health, and the tendency of consumers to turn the drug store shopping trip into a way to treat themselves (i.e., holiday items, small gifts, cosmetics, candles, candy, etc.).

Perhaps the best possible news this holiday season would be "No Bad Surprises." Sales that meet analysts' expectations could go a long way to soothing the "animal spirits" of our economy.

Equally interesting will be the ways in which retailers evolve. The winners' circle was small last holiday season -- namely including only retailers like Kmart, whose redeployment of layaway did well, while CVS and Walgreens were competitive on holiday items; Wal-Mart, which leveraged shoppers' move from "tempt me" to "help me save," as well as youth-oriented retailers such as Gamestop and Aeropostale. Just like "Heroes," retailers cannot wait for a rescue, but must create their own opportunities to survive and thrive.