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Modest Gains Seen For Holiday CE Sales

Holiday sales for consumer electronics specialty retailers will likely rise a modest 3.6 percent on average compared to the year-ago period, according to a new report by Lehman Brothers.

The brokerage’s 2006 Preliminary Holiday Outlook predicts that sales will be stifled by higher interest rates and a hurting housing market, which will preclude consumers from refinancing and/or borrowing against their homes. The extra cash that homeowners had extracted from their mortgage equity during the period of low interest rates and soaring housing prices had been a strong driver of discretionary sales.

Nevertheless, Lehman Brothers’ retail team believes that “an incredibly intense consumer desire” to purchase such sexy CE products as flat panel TVs and the forthcoming PlayStation 3 and Nintendo Wii will continue to drive strong comparable store sales. The chief beneficiary of those trends, it argues, will be Best Buy, which will continue to enjoy triple-digit unit growth of flat panel TVs as average selling prices decline, and will continue to reap benefits from its IT and custom install services. The No. 1 CE specialty chain is also well-positioned to take advantage of the launch of Microsoft’s new Vista operating system in January, which should further boost the retailer’s post-holiday sales.

All told, Best Buy is estimated to post a 3.5 percent same-store sales increase for the fourth quarter, compared to last year’s 7.3 percent gains. Circuit City is going up against even tougher year-ago comparisons: same-store sales spiked 11.6 percent during the fourth quarter of 2005, and Lehman Brothers anticipates that the No. 2 CE specialty chain will still achieve an impressive 5 percent comp increase this year.

By contrast, RadioShack, which had a 4 percent comp store gain last holiday season, is projected by Lehman analysts to post a 1-percent increase this year.

Elsewhere, CE is expected to be a “very big focus again” for Wal-Mart, particularly in the HDTV, digital camera and portable music player categories, the report said. CE may also benefit from a new strategy at BJs that focuses on decreasing the number of SKUs while increasing their quality. Some 60 percent of the wholesale club’s CE departments have been reset to reflect a “prototype” assortment, Lehman said, compared to 30 percent last year.

The holiday season should also benefit from one extra shopping day this year, which happens to fall on a Sunday. That alone could boost holiday sales by as much as 1 percentage point, according to the report. Energy costs, which make up a “surprisingly small amount of personal consumption, even at the record high levels reached this summer,” should be a non-issue for the season, Lehman said.

The Conference Board, in its latest Composite Index of Leading Economic Indicators, concurred. “The decline in gasoline prices frees up some spending power for consumers,” said Conference Board labor economist Ken Goldstein. “On the negative side, the sharp cooling off in the housing market weighs on consumers.” His prognosis: “Continued modest growth this autumn — probably right through the holiday season and into the winter.”

Indeed, the post-Christmas season should prove to be a busy time for retailers as well, Lehman projects, with 20 percent of total holiday revenue recorded in January, fueled by gift card redemptions.

Fourth Quarter Sales Comparisons