Outlook for Holiday: Positive—With Pitfalls

Retail forecasters are predicting a generally good Christmas, although they worry that consumers’ wallets will take a hit because of high gas prices and the fallout from Hurricane Katrina.

On the plus side, the job and stock markets remain strong, and retail sales have generally held up this year. On the minus, gas prices continue to rise, Hurricane Katrina has devastated one region and hurt the nation psychologically, interest rates are rising, and consumer confidence has plunged in recent months.

Inside the industry, people were generally upbeat about the holiday selling season. “We believe it will be a strong second half [for diamond jewelry sales],” said Varda Shine, who will soon take over as managing director of De Beers’ Diamond Trading Company, at a conference of analysts. “We believe the hurricanes aren’t going to make a significant impact on diamond-jewelry consumption. However, the high oil prices may have an impact.”

Still, oil prices should “impact the lower end of diamond-jewelry consumption in places like Wal-Mart,” Shine said. “All our research shows that high-end jewelry will be in demand regardless of oil prices.”

The National Retail Federation, meanwhile, predicted overall retail sales will grow 5 percent this year—a “moderate” increase, and less than last year’s 6.7 percent.

“Five percent is actually still above average,” notes Ellen Davis, the group’s spokeswoman. “In spite of some negative economic indicators, there are some positive indicators that are spurring growth.

“We expect that luxury will do well this year,” she said, adding that while gas prices and the impact of Katrina are a concern, “ultimately it’s important to remember that many consumers plan ahead for the holiday season and save for it all year long.”

Meanwhile, Ernst & Young also forecasts a dip from last year. It anticipates sales will rise 6 percent to 7 percent—compared with an 8.3 percent increase in 2004. “We think it will be a good but not spectacular season,” said Jay McIntosh, director of retail and consumer products for Ernst & Young. “Retail sales have been strong all year.”

Like other commentators, he predicted upper-income consumers won’t be hit hard by gas prices. “Nothing impacts the very rich,” he notes. “We would expect that luxury retail will continue to be strong, with the caveat that, with the hurricane devastation in Texas and Louisiana, people may not feel right splurging on what could be considered frivolous items. But we are hoping that by the time Christmas rolls around, there will be images of people rebuilding.”

The big impact of oil prices could be on midlevel consumers looking to trade up, he said. “If we have a cold November, and people get that big heating bill before Christmas, that could be a big negative,” he said.

But all this does not mean that traditional retailers can necessarily rejoice: McIntosh also predicts that online sales will be strong this year, and he foresees a lot of promotional pricing.