Investors say they have no cheer in holiday outlook

The holiday shopping season is bringing consumer-oriented private equity firms little to celebrate this year, as investors are expecting poor sales to affect thier portfolio companies, according to speakers at the Thomson Reuters Buyouts West conference last week in Beverly Hills, Calif.

“People have largely written this Christmas off and don’t want to have lingering problems in 2009,” says John Baumer a partner at Leonard Green & Partners. “If you get surprised in the upside and you can’t deliver the inventory, that’s the mistake we’re prepared to make.”

How bad will it be? Real bad, according to the PE pros. “Christmas spending is going to be down 10% to 15%,” says Jim D’Aquila, a managing director of the Mercanti Group. He cited market statistics from an industry research group: “Shopping is going to be something to the tune of $550 shopping per family, down from $631 last year.”

Those dire predictions have put the brakes on investment. “There’s traditionally very little investment in this period since retailers think they’ll have great sales and investors are skeptical, so they settle up in February instead,” says Baumer.

But uncertainty about fourth quarter sales of consumer goods and the performance of retail stores is perhaps higher now than at any point in the past five years. “Nothing’s getting done in the consumer space right now,” D’Aquila says. “The investor is always going to have a more dire view than what is actually going to happen.”

Small, local retailers are getting hit the hardest. “We’re seeing a real downturn in mom-and-pop shops,” says Michael Mauze, a managing director of VMG Partners. Mauze’s firm invested in bag-maker Timbuk2, which has seen sales slow due to problems at small shops.

“They can sell through their bags and not even think about re-ordering,” Mauze says of the small businesses. “They look at their inventory as one big block of inventory in the back room.”

Not all consumers react to a downturn in the same way. “It’s the wealthy that are adjusting fastest,” says D’Aquila. “The people who are cutting back the most are the $75,000 to $125,000 households. It’s the males that are driving this. It’s been true in every recession, the males cut back faster.”

But the distress makes for plenty of investment opportunities. “From a lending perspective, we focus on strong, stable brands,” says Lee Landrum a principal at The Carlyle Group. “Things we want to be careful on are the companies that fall in the discretionary or gift-oriented items.”

D’Aquila looks at it differently. “Shopping minds think about essential versus non-essential,” he says. “You have to look at what’s core to your life. Anti-aging facial cream is discretionary, but women aren’t going to stop putting it on every night. It’s essential to their life.”

A recession could also help weed out poor companies. “This downturn will be steeper and longer than what we’ve seen before and strong brands will come out better and look very favorable to potential strategic acquirers,” says Mauze.

That, of course, is little consolation to companies relying on consumer spending in the coming months.