WHEN the Christmas lights on Regent Street were switched on last week, it marked the beginning of the most important period of the year for high-street retailers. Many can earn 60 per cent of their annual profits in the peak weeks of Christmas. <br /><br />After a dismal end to 2008 when it seemed like retail chains were disappearing daily, the high street will certainly be hoping for a better 2009. But while two of the biggest high street chains, Marks and Spencer and Next, both posted consensus-beating profits in the third quarter, they remained cautious about the outlook for Christmas. <br /><br />And rightly so, it would seem. The Deloitte Retail Review 2009 published last week says that its survey of consumers shows that the trend of last year continues. <br /><br />“As consumers come to terms with the state of their balance sheet and the reality of lower long-term disposable income growth, they will start to adopt a more cautious approach to spending and this will be particularly true this Christmas,” it says.<br /><br />Indeed, 40 per cent of respondents said that they would be spending less than they normally do this year, compared to 24 per cent who said the same last year. The planned average total spend is £541 in 2009, down from £665 in 2008.<br /><br />Even more worryingly for high street retailers, the internet is expected to be the most popular means of shopping for gifts as consumers hunt for the best deals. While the big chains will have websites, internet shopping does not lend itself as well to impulse buys. <br /><br /><strong>SKINT UK<br /></strong>Consumer confidence is improving but remains fragile. Notably, Marks and Spencer’s executive chairman Sir Stuart Rose last week warned that the UK was “skint” and that it might be 2011 before we start seeing some growth.<br /><br />Deloitte’s review bleakly noted: “There still seems to be too much uncertainty in job prospects and economical and political environments to give consumers the full confidence needed to spend the way they did in 2007.”<br /><br />So with a cautious outlook for the Christmas season predicted, which of the retailers are expected to come out of the trading season best and how are their share prices likely to be affected?<br /><br />November and December are always historically a good time of year for retail stocks, says Capital Spreads’ head of sales Angus Campbell, who adds that good results from M&S and Next “seem to have kick-started the retail sector quite nicely”.<br /><br />Analysts are positive about the outlooks for both M&S and Next. Nomura’s Frazer Ramzan has raised his target prices and estimates on both stocks following their results, putting M&S at 420p and Next at 2,200p.<br /><br />These are the two biggest general retailers on the FTSE 100, but there are plenty of other listed. For example, DSG International’s brands include Currys and PC World while Home Retail Group owns Argos. These stocks will be heavily influenced by what happens in the Christmas shopping season. Home Retail believes that consumers will continue to be frugal for the rest of the financial year.<br /><br />Their fortunes are likely to be largely dependent on customers’ attitudes to sales. The received wisdom in the industry is that consumers are now so used to stores discounting goods on a regular basis that many retailers believe that consumers will postpone their purchases on the assumption that stores will drop prices later. <br /><br />IHS Global Insight’s Howard Archer says that it will be interesting to see how aggressive shops are in their pricing strategies. He thinks that customers and retailers might become involved in a bizarre game of brinkmanship. Customers will put off purchases in the belief that shops will have to discount prices sooner or later. But shops will refuse to do this, and assume that customers will eventually take the plunge. “With serious pressures on both retailers and consumers, it may ultimately come down to a question of who cracks first,” Archer says. <br /><strong><br />SLUGGISH SALES</strong><br />He reckons that if sales start off sluggishly, then pressure will mount on retailers to engage in early discounting and promotions such as “flash” sales to try and boost revenue. And with Christmas falling on a Friday this year, consumers might be tempted to leave their Christmas shopping even longer. <br /><br />For now, at least, M&S’s Stuart Rose has played down the possibility that last year’s nationwide 20 per cent off sales will be repeated and said last week that the intention was to trade fully priced up to Christmas. <br /><br />Early discounting and promotions may keep the Christmas cheer going for now, but this may affect the companies’ bottom lines when they come to report their quarterly results in the Spring. <br /><br />For spread betters looking to take out a short-term position on the high street retailers, going long might prove profitable. Just be willing to take your profits off the table if consumers decide to keep their wallets closed.