CORRECTED-UPDATE 3-US retailers scramble after lackluster holiday sales

(Corrects spelling of analyst's name in paragraph 15 to Marshal

Cohen, not Marshall Cohen)

* MasterCard SpendingPulse sees growth under 1 pct

* Retail stocks sink in Wednesday trade

* Analysts warn of deep discounts to cut inventory

Dec 26 (Reuters) - The 2012 holiday season may have been the

worst for retailers since the financial crisis, with sales

growth far below expectations, forcing many to offer massive

post-Christmas discounts in hopes of shedding excess inventory.

While chains like Wal-Mart Stores Inc and Gap Inc

are thought to have done well, analysts expect much less

from the likes of book seller Barnes & Noble Inc and

department store chain J. C. Penney Co.

Growth was always expected to slow this season, though an

improving employment picture and rising home values had helped

mitigate the worst fears. But then Superstorm Sandy hit the East

Coast in late October, mild weather blunted sales of winter

clothing and rising concern about the "fiscal cliff" became more

of a reality, dragging down already pessimistic forecasts.

"The broad brush was Christmas wasn't all that merry for

retailers, and you have to ask what those margins look like if

the top line didn't meet their expectations," said Kim Forrest,

senior equity research analyst at Fort Pitt Capital Group.

The latest sign of trouble came from MasterCard Advisors

Spending Pulse, which reported holiday-related sales rose 0.7

percent from Oct. 28 through Dec. 24, compared with a 2 percent

increase last year.

The preliminary estimate from SpendingPulse was in line with

other estimates showing weak growth during the holiday season,

when retailers can book about 30 percent of annual sales -- and

in many cases, half of their profits.

"It has been a very uneven industry performance, probably at

least for the last year, and that certainly continued into the

holiday season," said Michael Niemira, chief economist at the

International Council of Shopping Centers, in an interview with

Reuters Insider.

The latest holiday season could end up the weakest since

2008, during the last recession, when sales actually declined.

The National Retail Federation had previously predicted 4.l

percent sales growth this year, versus a 5.6 percent increase a

year earlier.

Markets reacted sharply to the gloomy outlook.

The S&P retail index fell 1.8 percent in midday

trading Wednesday, and 16 of the top 20 decliners in the broader

S&P 500 were retailers or consumer brands.

INVENTORY CRUSH

To be sure, the actual percentage change in holiday sales

can differ substantially, depending on which group is composing

the figure. SpendingPulse and the National Retail Federation,

for example, look at different categories, which can cause some

variation in their forecasts.

Regardless of how bad the figure is, one concern for

retailers is that soft sales will mean an excess of inventory

that will force some to slash prices.

Among other brands, Barnes & Noble offered 50 percent

discounts in stores via email promotions on Wednesday, while Ann

Inc had half-off at its Loft stores, and Bloomingdale's

promoted discounts of up to 75 percent in some cases.

Even in a good year, retailers would have offered discounts

to lure customers, but some suggest a weak year has now forced

their hands.

"Retailers are no longer chasing sales, they are chasing

inventory management. That means the discounts that they

would have liked to be at 50-60 (percent) off have climbed to 75

to even 80 (percent) off," said Marshal Cohen, chief industry

analyst at The NPD Group.

Erica Ayala, 31, a mother of four who lives in New York's

Harlem neighborhood, waited until the day after Christmas to

shop for that very reason, saving more than $150 on kids'

clothes alone at Gap's Old Navy chain.

"You can't go wrong with that," she said.

SANDY AND CLIFF

A variety of factors were thought to be at fault for the

weak season, starting with Superstorm Sandy, which depressed

sales in the Northeast in late October and early November.

Sales recovered in the second part of November, with early

hours and promotions helping drive traffic during the "Black

Friday" weekend after Thanksgiving, analysts said.

But there was a deep lull in early December as a winter

storm in parts of the United States may have limited sales, said

Michael McNamara, vice president of research and analysis at

MasterCard SpendingPulse.

On top of that, there were fears that taxes will rise in the

new year if Washington cannot negotiate a solution to the

end-of-year "fiscal cliff" dilemma.

A recent Ipsos poll for Reuters found that only 17 percent

of shoppers were spending less due to cliff fears, though

analysts said the damage was still done.

"The government usually does not have a role in holidays but

this year they did. They got right in the midst of it, the

timing couldn't have been any worse," NPD's Cohen said.

BRIGHT SPOTS

One bright spot has been online sales, which continue to

grow at a faster pace.

On Christmas Day, online sales jumped 22.4 percent,

outpacing the 16.4 percent increase in 2011, according to IBM

Digital Analytics Benchmark, which tracks more than 1 million

e-commerce transactions a day from 500 U.S. retailers.

Whether online or off, some of the winning retailers were

expected to be Wal-Mart, which attracted shoppers with early

deals on the night of Thanksgiving and kept its focus on value,

and apparel chains like Gap Inc, whose bright sweaters

were successful, according to analysts.

Toys sold well, and hot items that were harder to find later

in the season included certain Mattel Inc Barbie dolls

and LeapFrog Enterprises Inc's LeapPad2 tablet computer,

according to B. Riley Caris analyst Linda Bolton Weiser.

For retailers who have struggled, analysts said all hope was

not lost. Many have fiscal quarters that end in January, so they

still have time to benefit from a post-Christmas rebound.

Because Christmas fell on a Tuesday, some said they could even

see a boost this week from people who have extra time off.

"There's still a little bit more time to go until the

holiday season is officially over," Morningstar analyst Peter

Wahlstrom said.

(Reporting by Brad Dorfman, Nivedita Bhattacharjee and Jessica

Wohl in Chicago, Additional reporting by Chuck Mikolajczak and

Dhanya Skariachan in New York; Writing by Ben Berkowitz; Editing

by Jeffrey Benkoe)

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