Is It Too Early to Start Holiday Shopping?

Christmas is months away, but for many retailers the holiday shopping season has already begun.

Over the summer, stores like Sears (SHLD) and Kmart rolled out Christmas-in-July deals, many of which were intended to bring customers back for the holidays. Two months later, retailers began decking out their display windows with tree ornaments and holiday decorations.

But with consumer confidence subdued, unemployment near 10% and foreclosures still a concern, few consumers are thinking about holiday shopping, says Kimberly Picciola, a senior equity analyst at Morningstar. In most cases, they may be better off. The majority of retailers are unlikely to roll out their best holiday shopping deals until after Black Friday, she says.

Why? Most retailers lowered their inventory levels for this year’s shopping season compared to last year. That leaves them with more leverage to keep prices higher until the end of the shopping season.

Here are five questions consumers should ask themselves before starting their holiday shopping early.

Can I expect the same discounts this year as last year?

No. Although most retailers will continue discounting, their discounts won’t be as big as they were during last year’s holiday shopping season. Back then, retailers discounted their items by as much as 80% off their original price, says Marie Driscoll, a director in Standard & Poor’s equity research department. This year, most holiday sales won’t knock more than 40% to 60% off the original retail price, and they won’t be as widespread as they were last year, she says.

How does the timing of my purchase affect my selection?

Most retailers have lowered their inventory levels for the 2009 holiday shopping season on average by 10% from last year, Driscoll says. This means that retailers ordered fewer products from manufacturers.

With lower inventory levels, stores are less likely to discount products early, instead waiting to see how many units consumers purchase. Retailers won’t decide to significantly cut prices until around Black Friday — once they have a sense of how much inventory they still have, says Jeff Green, the president of Mill Valley, Calif.-based Jeff Green Partners, a retail consulting firm. In this case, the longer a consumer waits to shop, the more likely they are to find better deals.

Retailers say that consumers who are set on a particular item might run the risk of a sellout if they wait too long. As of the end of July, Macy’s (M) inventories were down 7.5% compared with last year, says Jim Sluzewski, a spokesman for Macy’s. He says the company expects its comparable sales to drop 5% to 7% between August and January, vs. this period last year.

“Last year, if you saw something in the store and liked it, the longer you waited the deeper the discount would get,” Sluzewski says. “This year, if you see something you like, it may not be there anymore if you wait because inventory is less.”

Green says this scenario is unlikely. “The consumer is more concerned about pressing things like jobs and housing to really be focused on Christmas,” he says. This week, the Conference Board, a New York-based business research group, said its Consumer Confidence index fell to 53.1 in September, down from an upwardly revised 54.5 in August. A reading above 90 indicates the economy is solid.

In what sectors will I find biggest discounts and when?

Consumer electronics retailers will offer the biggest discounts going into the holiday shopping season, Green says. In part, that’s because there’s a lot of competition between retailers like Best Buy (BBY), online shopping sites like Amazon.com (AMZN) and manufacturers like Apple (AAPL) and Dell (DELL). In this environment, chances are slim that a product will sell out across all three of those avenues, so manufacturers might wait until the last few weeks of the holiday shopping season to slash prices, Green says.

Home furnishing and accessories, as well as women’s apparel, will also offer big discounts between now and the end of the holiday shopping season, Green says. Most consumers have stopped shopping for their homes — with the exception of electronics, like high-definition televisions, which have also become a popular holiday gift, he says. In addition, consumers now are more likely to turn to practical gifts for their family and friends, like gift cards to restaurants or entertainment venues, instead of home accessories like tabletop decorations, Green says.

Stores selling women’s apparel will continue to see depressed sales because women with tight budgets – especially those with children – are more likely to focus on buying presents for their kids than themselves, he says.

Expect ongoing promotions like coupons and sales at department stores, he says.

How will the dollar’s strength affect my bottom line when shopping from a retailer abroad?

The dollar’s value is unlikely to drop significantly between now and the end of the holiday shopping season, Green says. Should fluctuations occur, they won’t impact most product pricing within the country since retailers purchase these products months before the holiday shopping season kicks in. Individuals who purchase items from a seller abroad could find themselves paying more should the dollar decline against the euro, for example, but a meaningful drop is unlikely within the next three months, Green says.

Bottom line: Shop now or wait?

Consumers should hold off until at least the middle of November to start their holiday shopping.

Ideally, try to wait until Black Friday. That’s when retailers will have a better sense of their inventory levels. By then, inventory should be lower than it was last year, but potentially higher than retailers had hoped. That’s when you’ll start seeing greater discounting, Green says.

In addition, merchandise on the racks will continue to change throughout the next few months. “A lot of merchandise that arrives in stores mid-October and beyond will tempt consumers,” Driscoll says. “If you start shopping now, what will you do then?”

Deals will likely get better as we move further into the holiday shopping season, particularly in December, she says. And as usual, during the last two or three days before Christmas, most inventory is worth up to 75% less because retailers want to unload it to make way for new inventory for the post-Christmas season.