Stocks to Dump This Holiday Season

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U.S. consumers end up channeling Ebenezer Scrooge this holiday shopping season. In August, consumer confidence plunged to its lowest level since early 2009 -- bad news for the already-sluggish economy, considering consumer spending accounts for roughly 70% of economic activity.

Plagued by high unemployment rates and uncertain economic conditions, more shoppers are looking for deals online, which could lead to a significant loss of in-store traffic. Here's a look at brick-and-mortar stores that stand to lose the most this holiday season.

What this means for retailers
Consumers continue to save more and spend less, which increases competition among specialty retailers like Abercrombie & Fitch (NYS: ANF) and American Eagle Outfitters (NYS: AEO) as they compete for the same customers.

These two retailers target the same 16- to 21-year-old demographic and are battling for brand exposure. Both have tried to expand their presence online to reach more shoppers. For instance, last year, Abercrombie had online sales of $352.5 million, up 41% from the previous year. American Eagle's AEO Direct unit posted sales of $334 million, roughly flat from the previous year.

But brick-and-mortar merchants aren't only competing against each other. The larger battle is with online retailers such as Amazon.com (NAS: AMZN) and eBay (NAS: EBAY) . Amazon is likely to repeat some of the free-shipping deals it has done in past years, while eBay will give fee discounts and other incentives to sellers that offer free shipping during the holiday season.

Alison Paul, vice chairman at Deloitte and U.S. retail and distribution sector leader insists: "As many holiday shoppers will be researching online and on their smartphones both before and during their trips to the store, retailers need to be sure their digital strategy is both flexible and focuses on a personalized experience this season."

Last year, e-commerce retail sales totaled $142.5 billion, according to research firm comScore. Forrester Research estimates that the online retail industry will be worth $279 billion by 2015.

Which retailers are web-ready?
Abercrombie & Fitch is taking the trend in e-commerce seriously. The company is redefining its online strategy in hopes of reaching $1 billion in online sales for the year.

The teen-apparel company's CEO, Mike Jeffries, expects e-commerce to drive continued growth in the future. He said, "We recently released an iPhone application and continue to invest in our mobile commerce platform. For the future, we are investing in some new initiatives that we believe will provide a significant boost for our direct-to-consumer business and beyond."

Abercrombie's direct-to-consumer (online sales) revenue accounted for 11.7% of total net sales in fiscal 2010 compared to 9.9% in fiscal 2009.

Conversely, clothing retailer Talbots' (NYS: TLB) direct-marketing sales, which includes Internet sales, decreased by 13.6% to $43.1 million for the second quarter this year. Management remains optimistic but continues to ignore the importance of attracting online shoppers. Talbots' top-line continues to worsen following heavy sales declines and slower in-store traffic.

Talbots also faces stiff competition from popular retailers such as Ann Taylor and Gap (NYS: GPS) . ANN's (NYS: ANN) Ann Taylor is one of the top 10 fastest-growing American brands, and the company's year-over-year earnings growth is leaving Talbots in the dust.

If online sales are any indication, ANN is right on the money. Unlike Talbots, ANN's stores have strong performance in the e-commerce channel -- total web sales for the Ann Taylor and Loft brands both grew 30% year-over-year.

Gap, on the other hand, falls into hot water with Talbots. In fact, online sales were the only upside to an otherwise gloomy first quarter for the specialty retailer. Gap's comparable-store sales declined 3%, but e-commerce rose 18% year over year to $348 million.

If Gap's management learns anything from these figures, it's the need to focus more efforts on its Internet and direct-to-consumer strategies. This time last year, Gap's website crashed, leaving online shoppers frustrated and confused.

With more customers shopping online this season, Gap and Talbots will need to get their site performance up to speed to accommodate the increase in traffic.

The holiday shopping cart will be half-empty for some retailers this season. Fill your cart with the year's best stock plays from our free report, "5 Stocks The Motley Fool Owns -- And You Should Too." These stocks were hand-selected by our top equity analysts -- to access this special free report, click here; it's free.

At the time this article was published Fool contributor Tamara Rutter does not own shares of any companies mentioned here. Follow her on Twitter@TamaraRutterfor an inside looks at stocks, e-commerce, and social media. The Motley Fool owns shares of Gap. Motley Fool newsletter services have recommended buying shares of Amazon.com and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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