Stores worry holiday sales may be permanent

Fourth-quarter profits are likely to decline more than 19 percent, said Ken Perkins, president of research company RetailMetrics LLC. Excluding Wal-Mart Stores Inc., one of the few bright spots, he said the drop is expected to reach almost 28 percent.

Perkins predicts that profits will keep falling into the first quarter, projecting an 11 percent drop; excluding Wal-Mart, that figure is likely to fall more than 17 percent.

The financial meltdown in September that led to an abrupt halt in spending came too late for merchants to dramatically adjust spring inventories. Many stores order goods four to seven months in advance.

And while spring inventories are estimated to be down as much as 30 percent from year-ago levels, many analysts say that inventories should be down even more. Barclays Capital analyst Jeff Black believes it will take at least until the back-to-school season to get inventories in line with consumer demand, and even then stores will still face the challenge of weaning shoppers away from deals.

For those shoppers who could still load up on deeply discounted merchandise, the last few weeks have been paradise. Even before the Thanksgiving weekend, the traditional start of the holiday shopping season, Saks Fifth Avenue marked down shoes by 70 percent.

But earlier deals look measly compared with some current offers as merchants try to get rid of their holiday products by the end of the month. The upscale DKNY store on New York's Madison Avenue is plastered with a sign proclaiming "Up to 90 percent off."

As retailers work to clear out old merchandise, analysts say many are trying to hold back on discounting new winter and spring items. Dan de Grandpre, editor-in-chief of dealnews.com, said he is seeing more bundling deals — a flat-panel TV that comes with a free Blu-ray system, for example.

But many doubt that such strategies will work and predict early discounts on spring goods. The signs are already there. Bebe has cut certain spring sweaters by 25 percent, while J.Crew has marked some spring items anywhere from 25 to 40 percent off, according to Amy Wilcox Noblin, an analyst at PaliCapital Inc.

It will be years before shoppers are going to be enticed by discounts of less than 50 percent, said C. Britt Beemer, chairman of America's Research Group.

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Traditional stores have also had to dump more excess goods at off-price retailers like TJ Maxx, which reduce prices more, said Marshal Cohen, chief industry analyst at market research firm NPD Group Inc.

But a bigger problem is liquidation sales at stores that are either closing specific locations or shutting down the entire business.

Going-out-of-business sales at KB Toys and Linens 'N Things put pressure on other retailers even before Christmas, and analysts expect competition to get fiercer amid a likely spike in bankruptcy filings.

James Schaye, president and CEO of Hudson Capital Partners LLC., which has overseen liquidations of Mervyns LLC, Tweeter Home Entertainment Group Inc. and Steve & Barry's, estimated that his company liquidated about $3 billion in merchandise in the October through December period, compared with about $400 million a year ago.

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