Holiday Retail sales analysis: a 3-part process

I spent all day yesterday shopping the stores here in Midtown Manhattan -- Gap, Banana, Williams-Sonoma, Pottery Barn, J. Crew, and Bloomie's. It dawned on me that there are 3 separate events happening, and any one of them can make or break the Christmas shopping season.

1. People have to actually show up in the stores and browse the merchandise with intent to buy. Bloomie's and J. Crew had reasonably good floor traffic; Gap/Banana and Williams/Pottery less so.
2. Consumers in the store must take goods to the register and pay for them, not just 'consider' an item and then put it back on the shelf. This bullet point sounds self-evident, but believe me it is not. I saw a heck of a lot of shoppers doing 'Touch and Feel' without actually getting into a checkout line and whipping out the credit card. Gap and Williams-Sonoma seemed to have a fair percentage of actual spenders, which may partially offset the lower floor traffic. Pottery Barn and Banana, in this observer's opinion, were noticeably weak in both points 1 and 2.
3. The most important aspect from a Retailer's perspective this year: what kind of incentives are to be given as an inducement for consumers? On this score, we have a huge problem for retailers (and a big Home Run for those of us with a steady job). I have never, in 17 years of shopping the stores, seen this depth and breadth of markdowns on the floor pre-Thanksgiving. Bloomie's was 30-40% off names that are NEVER on sale - Armani, Boss, and so forth. I'm sure there were equivalent discounts in the women's sections. My sister reports in from the West coast that Saks has tons of stuff at deep discounts as well. Don't bother logging on to their website, she's rigged it to lock out any potential competitors until she's finished buying what she wants. Try back in a week, she'll be done by then. I think.

Conclusion: Holiday traffic, though certainly not at the levels of previous years, will be pretty good vis a vis the dismal expectations of most analysts - but Gross Margins for retailers will be seriously compromised. Expect 4th quarter reports to show reasonable top-line sales, but a serious year-over-decline in net income due to GM compression. You heard it here first.