Retailers are already feeling a holiday shiver

NEW YORK - It may be hot and sticky outside, but stores across the nation are already getting a chill thinking about Christmas.

Retailers are having second thoughts about orders they placed earlier this year, when the economic recovery looked stronger and Americans were more willing to spend money. Now they worry they could end up stuck with too many toys and sweaters come the holidays and have to cut prices.

Stores are fretting that even small increases in their holiday stocks for this year may be too ambitious. Some are waiting to see how spending turns out in the back-to-school season before trimming their holiday orders, but others aren't wasting any time.

"I was feeling fantastic in March, and we were doing great. But then things started slowing down," said Lauren Phalin, who owns a New Jersey children's and teen clothing shop called Rocking Horse and canceled a $2,000 dress order in May.

"As long as I keep inventory and expenses down, we can still do fine," she said.

Most stores have until August to do any tweaking on their holiday orders, though the largest chains, which have more power over suppliers, can cancel some orders later.

A lot is at stake: For many retailers, holiday business accounts for as much as 40 percent of revenue and profits, says Ken Perkins, president of research firm RetailMetrics. For toy sellers, it's half.

With unemployment stuck near 10 percent and the stock market having wiped out its gains from earlier this year, Americans are skittish about spending as the second half of the year begins.

Retail sales fell 0.5 percent in June compared with the previous year, the government reported this week. Clothing chains had to slash prices on summer tops and shorts even more than they planned to entice customers.

Now, stores worry that merchandise will start piling up - back-to-school supplies first, then holiday trees and coats, leading to rampant price-cutting.

"It still feels like a fragile economy," said Brendan Hoffman, CEO of Lord & Taylor, which has plans in place in case sales slow down. Hoffman said that if business weakens, the department store will turn to more aggressive promotions.

Stores still are smarting from the huge discounts that made Christmas 2008 a disaster. They desperately want to avoid a repeat and have been cautiously increasing how much they put on store shelves.

For clothing stores, for example, holiday inventory is expected to be up slightly over last Christmas but still not back to 2008 levels, said Craig Johnson, president of retail consulting firm Customer Growth Partners.

Stores that placed their holiday orders based on increased demand in the spring, when the stock market was rallying and the economic recovery looked surer and stronger, were "living in a dream world," he said.

"We are climbing out of a deep hole, but it's a slow climb," Johnson said.

Another indicator suggesting it could be a lukewarm holiday season: Analysts expect fewer containers to arrive at U.S. ports. Those containers carry items such as furniture and clothing.

Hackett Associates, a shipping consultancy, expects 3.9 million containers to arrive in the fourth quarter at the 12 ports it tracks around the country, down about 10 percent from a forecast made just last month.

Matching inventory with demand in this choppy economy isn't the only problem stores face. Cotton prices are up about 60 percent compared with June 2009, according to Terry Townsend, executive director of the International Cotton Advisory Committee.

Damaged cotton crops because of bad weather in China and a drop in production are behind the soaring prices. That's making everything from blouses to sheets more expensive. Rising wages in China are driving up costs, too.

Many stores are trying to pass some of those costs to shoppers beginning at Christmas and especially next spring. A cotton shirt, for example, will be 2 to 4 percent more expensive this holiday season at any of the 450 stores in the Bealls Outlet Stores chain, said CEO Konrad Szymanski.

Perkins still expects earnings to grow for retailers, but says it should slow from 20 percent gains in recent quarters to the low teens by the fourth quarter.

Perkins says it was encouraging that only a handful of stores trimmed second-quarter earnings forecasts last week.