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Consumer Restraint Could Derail Dealers’ Joy Ride

Thanks to consumers’ seemingly insatiable thirst for flat-panel TVs and premium appliances, retailers are now coming off one of the best six-month periods in recent memory. But will it last?

Wall Street analysts — and Wal-Mart management — have long warned that high fuel prices, rising interest rates and a softening housing market will eventually take their toll on retail sales. Add to that the stock market’s recent retreat and you have a recipe for a retail rout.

So far, merchants remain optimistic about their prospects for the third and fourth quarters. But early warning signs suggest the possibility of a tough, promotional holiday season.

Bill Trawick, president and executive director of the NATM Buying Corp., was cautiously optimistic about the back half of the year during the group’s annual meeting in March. “Interest rates are rising but they’re still historically low. Analysts are predicting a softer second half in 2006, but we’re still pretty confident,” he said.

Indeed, despite strong first-quarter performances by Best Buy and Circuit City, early warning signs appeared, giving analysts cause for concern. One indicator of a possible slowdown in consumer spending was a falloff in traffic, reported by both major chains.

Bank of America retail analyst David Strasser observed that ticket was the key driver of comp sales for virtually every retailer last quarter, while traffic declined and unit growth in flat-screen TVs moderated. “The competitive environment could get more aggressive over the next two to six months,” he noted.

In another red flag, NATM’s Trawick observed last month that “appliance sales are beginning to slow a little bit.”

Analyst concerns weren’t lost on Best Buy and Circuit City, which addressed the macroeconomic environment during recent conference calls. “Headwinds remain,” acknowledged Best Buy chief financial officer Darren Jackson, citing high gas prices, rising interest rates and slowing housing starts. But Best Buy will also benefit from the tailwind of “a remarkably strong product cycle,” as “consumer wants can be more powerful than needs.”

Circuit City’s chief financial officer Mike Foss also acknowledged “concern about gas prices, interest rates and a slowing housing market. But we prepare contingencies to react if needed and are monitoring the situation very closely, and we have seen no material impact yet from these macro trends.”