UNEDITED

The breather holiday shoppers took after Black Friday continued during the first full week of holiday shopping. Retail sales increased by 3.3% from the year ago levels according to the ICSC. Earlier, the ICSC forecasted that holiday sales will increase 3.5% to 4.0% this year. Most of the retailers that reported same stores sales last week missed analysts' estimates. The CSFB Retail Same Store Sales Index increased 1.2% in November, below the expected range of 1.5% - 2.5%. General merchandisers performed relatively better with same store sales increasing 1.6%. Hardline retailers fared the worse with same store sales dropping 5.0% in November. This was the weakest month for hardline retailers since at least the beginning of 2002. Apparel & Accessories dropped 1.3% and off-priced stores experienced an increase of only 0.5%.

Circuit City reported that third-quarter revenue grew 3.8% to $2.5 billion, $0.1 billion lower than analysts forecasted. Same store sales dropped 4.3%. Citigroup analyst, Bill Sims, wrote that the "softer-than-expected sales were a result of weak 3Q retail traffic, driven by unfavorable merchandising decisions and lack of low-end consumer buying." Circuit City said it blamed, "a strategic decision to be less promotional." Citigroup said this "exacerbated already weak traffic." It is also interesting to note that higher ticket items were strong, digital TVs were up over 100%, but as we have heard numerous times, low-end items were weak.

Wal-Mart was one of the most discussed retailers following Thanksgiving weekend. The retailer said that sales were hurt because it cut back on promotional activity. Last week, it said that November same store sales increased only 0.7%, well below the 2% - 4% range the company forecasted. Additionally, Wal-Mart noted that it saw strength in groceries, with weakness in general merchandise. It now expects December same store sales of only 1% - 3% and has stepped up its promotional activity.

Furniture Brand, the largest manufacturer of furniture in the US, announced that it expects earnings for the fourth quarter to be at the lower end of the range given last month. It also said that the weak trends it saw at the end of the third quarter have continued. W.G. (Mickey) Holliman, Chairman and CEO, said, "We believe overall economic concerns are contributing to a weakness in consumer confidence that is negatively affecting the consumers' willingness to invest in big-ticket, discretionary purchases like furniture. We expect these order trends to continue through the balance of the year."

Pier 1 reported that third quarter earnings would be between $0.21 and $0.23, lower than previously lowered estimates of between $0.04 and $0.29. The company said that sales were lower than expected, up only 1.1% with same store sales dropping 9.1%. To combat lower traffic, the company cut prices by ten percent ad to drive traffic.

The non-manufacturing ISM unexpectedly rose in November, increasing 1.6 points to 61.3. It was also the first month over 60 since July. While the headline number rose, five of the nine components declined. Most notable was the 3.1 drop in price, however at 71.0, it was the fifth highest level ever.

The ISM released the results from its latest semi-annual survey this week. Purchasing and supply executives expect the good times to keep on rolling next year. Seventy-five percent of manufacturing respondents expect revenues to increase. Including the other 25% of managers, revenues are anticipated to increase 7.8%. The non-manufacturing counterparts forecast revenues to increase by 5.9% in 2005. Other results of the survey are:

• Operating rates have slipped to 83% since the April survey for manufacturers, but remain higher than a year ago when they were 80.1%. Non-manufacturers reported operating at 88.2% of capacity, which is higher than the 85.4% reported in April and 85.6% last year.

• Manufacturing capacity increased 4% during the year, this was much greater than the 1.2% increase in 2003. The two primary ways capacity was increased was by increasing the number of hours existing employees worked and purchases of additional plant and/or equipment. Additionally, managers expect to increase capacity by 5.6% in 2005. The non-manufacturing sector reported a similar 3.1% increase in capacity with a 4.4% increase expected in 2005. The non-manufacturing sector cited hiring additional personal in addition to working existing personal more in achieving higher capacity.

• Capital spending soared 15.1% in 2004 for manufacturing companies, significantly outpacing the 6% increase predicted in April. But it appears that this was a one-time surge. Purchasing managers expect capital expenditures to increase only 1.6% in 2005. The non-manufacturing sector increased capital spending by only 4.5%, slightly lower than the 4.9% increased anticipated in April. Similar to the manufacturing sector, the non-manufacturing managers expect capital expenditures to increase by only 1.8%.

• Non-manufacturing managers expect employment to increase by 3.1% in 2005, more than the 1.6% increase that manufacturing managers forecast. Both groups forecast that labor and benefit costs will increase faster than they thought last year. Manufacturing managers expect an increase of 3.4% in 2005, while non-manufacturing managers predict a slightly higher increase, 3.7%.

• Profit margins have expanded over the past few years and managers expect margin expansion to increase. Thirty-nine percent of manufacturing managers expect margins to increase from November 2004 to April 2005, only 21% forecasting that margins will get worse over the next six months. The service side is a little more optimistic. While 37% foresee profit margins to get better, only 13% expect margins to worsen.

• Manufacturing managers reported that prices increased 7.6% in 2004, significantly higher than the 1.3% increase last year. Prices are expected to escalate another 11.2% next year. Non-manufacturing managers expect a much more benign 4.8% increase.

There is a hint that steel prices are staring to cool. Nucor lowered prices by $30 per ton on its merchant, structural and reinforcing bar products. Bloomberg reported that the price cut is to enable the company to better compete with imports. The price cut is effective immediate, which might indicate that the cut is to spur demand for its products during the seasonally slow holiday period. There is still an overwhelming number of companies announcing price increases. Also this week, Arcelor, Europe's largest steelmaker, announced that it plans to increase prices by 5% to its automotive customers.

After showing amazing strength for most of the year, consumers have started to slowdown. Also, they have become conditioned to wait for sales. This does not bode well for retailers. Last year, the last week before Christmas was the strongest week for consumer spending. Are consumer waiting for retailers to cut prices before hitting the mall? It is very possible. There still is not a lot of evidence that the economy is slowing much besides the last few months in retailing. This should bode well for holiday spending, but not necessarily retailers.