WWD

By Evan Clark

The first half of 2010 ended Wednesday with consumer enthusiasm for apparel weak, retail stocks battered and fashion's hopes for the year resting heavily on the fate of the back-to-school and holiday seasons.

While there's little indication the always fickle, suddenly thrifty teen crowd will come to the industry's rescue, one symbol of the holiday season sees reason for hope: Saint Nick.

"I can't see any dramatic change downward," said Robert Mindte, chief executive officer and founder of Santaforhire.com, which has a network of about 200 Santas-for-hire. "All the mall-type jobs I had last year, we're having again this year. Some of them are extending the hours somewhat," adding 10 or 20 percent.

Retailers will be fortunate to generate those kinds of increases as they head into the last six months of the year. Economists and analysts expect consumers to remain conservative about their spending against a weak economic backdrop and growing uncertainty that reduced retail stocks 13 percent in May, leaving them down 6.2 percent so far this year.

"Spending and sales growth are probably going to moderate a bit; we think the first quarter may well be the best quarter of the year in terms of spending growth," said Scott Hoyt, senior director of consumer economics at Moody's Economy.com, noting first-quarter sales rose 2 percent from the fourth quarter.

"Growth's going to be OK," he said. "It's not going to feel like a strong recovery. We're going to be faced with 10 percent unemployment. We're going to be faced with only modest job growth. Now we're going to muddle through the rest of this year before things really accelerate, probably by this time next year."

The boost of government supports, such as the homebuyer tax credit and credits for energy-efficient appliances, are also going to fade even as efforts to extend unemployment benefits appear to be heading toward a Congressional dead end.

Retailers are tentative heading into the second half as increasingly difficult comparisons make it harder to hit third- and fourth-quarter numbers.

"Profitability should be consistent because we don't see a major increase in inventory," said Jane Hali, vice president at The Doneger Group. "I would say minor increases, under 5 percent, going forward. And they've just put that into the classifications that are doing quite well - footwear and accessories. These are categories with a lot of fashion, a lot of newness."

Accessories are also an easy, and relatively cheap, way for the budget-conscious consumer to update her wardrobe.

Consultant Craig Johnson, president of Customer Growth Partners, said the second half would be "a mixed bag," but that he was sticking to his forecast for annual sales growth of 4.6 percent, excluding automobiles and gasoline.

Johnson said back-to-school sales would rise as much as 5.5 percent, which he characterized as "relatively good" compared with "the worst back-to-school since World War II" in 2009.

The most immediate proxy for the performance of retailers - the stock market - has been more down than up lately, after a bull rush from the market's recession bottom last year.

Continuing its recent downward trajectory, the S&P Retail Index slid 0.6 percent, or 2.46 points, to 385.82 Wednesday, the lowest close since November. The sector dropped 3.8 percent Tuesday on an unexpected retreat in The Conference Board's Consumer Confidence Index.

The Dow Jones Industrial Average fell 1 percent, or 96.28 points, to 9,774.02 Wednesday, building on the belly flop that pushed blue-chip stocks below 10,000 Tuesday.Stocks are a leading indicator, generally seen as predicting where the performance of companies and the economy will be in about six months. That's one of the reasons retail issues rallied last year - investors were betting that stores would see a big rise in profits as cost cuts and inventory efficiencies took hold and consumers recovered from the recession blahs.

Investors were correct, in part, and profits were up in the fourth quarter, but retail hasn't been able to put together a second act built on sales growth.

Instead, investors got ahead of themselves in the first four months of the year based on blowout March sales and then pulled back when April and May sales disappointed. The retail index, poised just below 500 on April 26, has lost nearly 23 percent of its value since. While retailers' numbers remain relatively good - especially in areas such as gross margin and inventories - stock market sentiment reflects the uneven, even fearful mind-set of consumers as stores enter the back half of the year.

"The second half is going to be mushy," said Paul Nolte, investment adviser and managing director with Dearborn Partners. "We see GDP around plus or minus 1 percent. We haven't seen any real big changes in [consumer] patterns either. They're continuing to pay down debt and be a little bit more cautious about spending and where they are spending. It's what I call pocket change stuff."

Much depends on the labor market. "The main driver going forward will be income with employment starting to recover," said IHS Global Insight economist Sara Johnson. "The expansion is broadening. I think we'll see more spending from the middle-income groups rather than the high-end groups that benefited from the stock market gains last year."

Following two years of declines, Johnson said real consumer spending would rise 2.5 percent this year and close to 3 percent next year.

The lower figure "is about the norm for the next few years, which is maybe disappointing for a period of economic expansion, but there are some headwinds. We could see higher taxes taking a bite out of income [next year], particularly at the upper end of the spectrum."

Retail might be plodding into the second half with no new sales story to tell, but some of the themes that started during the recession are continuing.

Steven Greenberg, founder and president of retail advisory The Greenberg Group Inc., said some retailers are selling less but are also paying less rent, and with other expense cuts have been able to generate better profits.

Some retailers are also expanding as their overextended cohorts pull back.

"You're going to see some more bankruptcies and you're going to see some companies have to shed stores to stay alive," Greenberg predicted. "There's a certain amount of attrition going on. As some stores close, there are several other retailers waiting in the wings. We're busier than ever."