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Disappointing Sales’ Silver Lining

Consumers didn’t shop as much as economists had expected in December, according to new data released this morning. But while the disappointing report may spell trouble for investors looking for continued strength in the U.S. economy, analysts say it could be good news for consumers.

Retail sales rose just 0.1% last month from November, according to the Census Bureau, below the 0.3% gain expected by economists. Excluding autos, sales fell 0.2%, marking the first decline in that category since May 2010. “It’s a bit of a disappointment,” says Robert Brusca, the chief economist at Fact & Opinion Economics. “There still seems to be some strength in the trend there, but it wasn’t what we were looking for,” Brusca says.

Indeed, what had appeared to be a steady pattern of monthly gains is now starting to look a little weaker, Brusca says. The sharpest rise in retail sales came in September, and subsequent months have posted weaker gains in a “decaying pattern,” he says. “It has been a recovery that has had a lot of this kind of turbulence, where growth would pick up and we’d get optimistic and then it would fall back down,” he says. Today’s report isn’t enough evidence to say for sure that economic improvement has stalled again, but it certainly raises that question, he says.

For investors, today’s report suggests retailers’ fourth-quarter earnings reports may also disappoint, says Paul Nolte, the managing director of Dearborn Partners. Same-store sales for December have also been weaker than analysts expected, he says. “What we heard from the retailers earlier in the month was that Christmas wasn’t necessarily fabulous,” he says. In this environment, discount retailers are likely to do better, while mid-range stores like Sears or J.C. Penney may struggle, he says. Investors should stick to defensive sectors, although some of those sectors, including utilities, have already seen strong gains in the past nine months or so and aren’t likely to keep rising that rapidly, Nolte says.

But what’s bad news for retailers and investors  could be a win for shoppers, experts say. “It’s the best of all possible worlds,” says Robert Passikoff, founder president of marketing consultancy Brand Keys. A bad result for retailers is a boon for their clientele, he says. “There is no downside for consumers.”

While retailers have managed their inventory better than previous years, bumper returns this January will also help savvy shoppers find the right size and brands, analysts say. Retailers estimate that holiday returns will exceed $46 billion this year, an increase of 10% from two years ago, according to the National Retail Federation. Clothing is the No. 1 return, says retail analyst Jeff Green. He sees more “average” sizes being returned.

Traditional electronics like TVs, digital cameras and laptop computers will likely see more price cuts than other categories, experts say. As SmartMoney.com reported, Best Buy posted a mid single-digit decline in TV sales, Costco Wholesale said TV sales fell by double digits on the year in December, while Target also reported lower demand for electronics. Yung D. Trang, president of TechBargains.com, consumers will be persuaded to upgrade on these gadgets – if the price is right.

However, that tight control on inventory could have a downside for those who want that winter coat in just the right shade of green. Steep discounting also leaves less unsold stock, says Edgar Dworsky, founder of ConsumerWorld.org. As they review these results, Passikoff says retailers could also pull back on the 24/7 door-busting sales that rewarded them with a weaker-than-expected bottom line. “With all the discounting, extra days, late hours, couponing and advertising, what did retailers get?”

This story was co-written by Sarah Morgan and Quentin Fottrell.

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