But a historic drop in retail gasoline prices and auto sales may have exaggerated the decline.  Filling-station sales mirrored the recent drop in prices from $4 a gallon in July to less than $2 a gallon recently. Auto sales fell 2.8%, confirming automakers’ assertions that business had sunk to the lowest levels in decades.

Excluding gasoline, which fell by almost 15%, retail sales fell just 0.2%.

In fact, without sales of autos, gasoline and building materials, sales actually rose 0.5%, the most since May.

“The financial markets were braced for a horrific retail sales report for November, but the numbers were actually not so bad,” Mark Vitner, a senior economist for Wachovia Corp. (WB), told MarketWatch.com.

Retail fell a projected 2%, according to the median estimate of 73 economists in a Bloomberg News survey. Economists consider retail sales to be a bellwether for the overall economy since it accounts for about 50% of all consumer spending.

There were some promising stats, however. Aside from the automotive sectors, sales surged in almost every other important category.  General merchandise store sales rose 1.3%, the biggest gain in three years. Electronic stores had a 2.8% jump in receipts.

Purchases at department stores rose by the most in three years as Americans took advantage of discounts by retailers from Macy’s Inc. (M) to Best Buy Co. Inc. (BBY) to start shopping for the holidays.

But while it appears retailers have been successful in getting consumers to loosen the spending reins with aggressive discounts, the devil may be in the details.  Retailers have been consistently warning that their profits will suffer from the heavy discounting they’re using to entice shoppers.

Neiman Marcus, the luxury retailer owned by ) and TPG Inc., which recently used heavy discounts to reduce inventories, said this week that profits dropped in the quarter ended Nov. 1.  Purchases of expensive goods are also falling because of tight credit restrictions imposed by banks.

Retail analysts have been increasingly concerned about “cherry-picking,” where consumers storm the aisles for heavily advertised items, but leave the store without making other purchases.

That has led some to question the validity of the numbers themselves.

“We are somewhat suspicious of the November results and believe that a seasonal adjustment quirk may have influenced the results,” wrote David Greenlaw, an economist for Morgan Stanley (MS), MarketWatch reported.

Same-store sales in the U.S. fell 2.7% in November from a year earlier, the biggest drop since records began in 1969, the International Council of Shopping Centers said last week.

And aworsening labor market is unlikely to sustain any rebound.  The employment outlook is likely to drag down holiday shopping, a time when many stores expect to reap up to half of their annual revenue.

The unemployment rate climbed to 6.7% percent in November, the highest level since 1993. Employers have cut 1.9 million workers from payrolls so far this year.  Surging unemployment usually leads to a plunge in consumer confidence and spending cutbacks.

A dismal holiday shopping season also bodes ill for retail sales throughout 2009.  That could likely lead to a consolidation in the sector with many retailers closing their doors for good.

In fact, bankruptcies of stores such as Sharper Image Corp. (OTC: SHRPQ) and Circuit City Stores Inc. (OTC: CCTYQ) are already having a negative effect on the sale of gift cards, with consumers afraid to bet on long-term survival of some retail franchises.

Counting on the survivors being the heavy discounters such Costco Wholesale Corp. (COST) and the world’s largest retailer, Wal-Mart Stores Inc. (WMT).

“This is Wal-Mart time,” Chief Executive Officer H. Lee Scott Jr. told Wall Street analysts during an Oct. 27 presentation at company headquarters in Bentonville, Ark., BusinessWeek reported. “This is the kind of environment that Sam Walton built this company for.”

Plunging Auto & Gas Sales Hurt Retail Sales in November

“The decision to restructure the business through a Chapter 11 filing should provide us with the opportunity to strengthen our balance sheet, create a more efficient expense structure and ultimately position the company to compete more effectively,” James A. Marcum, vice chairman and acting president and chief executive officer, said yesterday (Monday) in a statement.

In the past year and a half, Circuit City has created nothing but a collection of ugly headlines. The Richmond, VA-based Circuit City has $3.4 billion in assets and $2.32 billion in liabilities, including a $119 million debt to Hewlett-Packard Co. (HPQ) and a $116 million debt to Samsung Electronics Co., Bloomberg reported.

Most recently, the fledging electronics retailer announced it would close 155, or 20%, of its 566 U.S. stores by Dec. 31 and slash its domestic workforce in an effort to conserve cash and reverse six consecutive quarters of falling sales.

The company has already slashed retail management positions, eliminated jobs at its corporate offices and laid off 3,400 retail workers.

On March 28, it was ousted from the Standard & Poor’s 500 Index.

The following month, Blockbuster Inc. (BBI) made an unsolicited $1 billion acquisition bid for Circuit City, offering at least $6 a share. The idea was to create a “supermedia” retailer that might be more competitive against such rivals as Best Buy Co. Inc. (BBY). But that offered fizzled.

In May, the company put itself on the auction block, a day after Best Buy announced plans to open stores in Europe via a $2.1 billion, 50-50 joint venture with London-based Carphone Warehouse Group PLC.

In June, Circuit City suspended its 4 cent dividend. And in September, President and CEO President Philip Schoonover resigned on the spot.

Circuit City has lost more than $5 billion in stock-market value in the past two years, Bloomberg reported.

Circuit City Files for Bankruptcy After a Year of Falling Sales and Corporate Cutbacks

After a private bid went unanswered, Blockbuster made an unsolicited $1 billion acquisition bid for wounded electronics retailer Circuit City Stores Inc. (CC) for at least $6 a share – a move that sent Circuit City’s shares up 60% in pre-market trading Monday.

Blockbuster said it first approached Circuit City Chairman and Chief Executive Officer Phillip Schoonover with the offer on Feb. 17, but when the movie-rental giant didn’t get a response, Blockbuster decided to take its proposal public “because it believes the shareholders of Circuit City should have the opportunity to participate in determining the destiny of the company.”

However, Blockbuster already has an outline with regard to what that “destiny” would be: The merged companies would create a $18 billion retail enterprise that would benefit from their complementary products, marketing, distribution and financial synergies.

“Our vision for the ‘new’ Blockbuster is to be the most convenient source for media entertainment,” Blockbuster Chairman and Chief Executive Officer James Keyes wrote in a letter to Schoonover.

A Blockbuster Deal for a Browbeaten Market

Circuit City is the second-largest electronics chain in the United States, but the company has struggled recently. Over the past year the company has slashed retail management positions, eliminated jobs at its corporate offices and laid off 3,400 retail workers.

Making matters even worse: Circuit City not only lost more market share to industry leader Best Buy Co. Inc. (BBY), on March 28 it lost its spot in the Standard & Poor’s 500 Index.

Blockbuster hasn’t faired much better. Once an innovative icon in family entertainment and a cornerstone in the realm of media distribution, Blockbuster has more recently been the victim of increased competition and such technological changes as “video-on-demand” that have threatened its business. So it’s cut marketing costs and shed unprofitable customers in a desperate bid to fend off the Internet-based Netflix Inc. (NFLX).

The company’s troubles have led some – including Circuit City – to question whether or not Blockbuster even has the capital to follow through on its $1 billion all-cash offer.

“To date Blockbuster has been unable to satisfy Circuit City and its advisers that Blockbuster’s proposal could be financed,” Circuit City said in a statement.

The statement also questioned whether the proposed acquisition would require debt financing (and, if so, what the terms and structure would be) and how large a rights offering would be required to fund the transaction.

In a conference call, Blockbuster’s Keyes said the company has the support of billionaire board member Carl Icahn.

Presuming Blockbuster does indeed secure the proper financing, Louis Basenese, an mergers and acquisitions (M&A) expert and the editor of The Takeover Trader newsletter, said the deal bodes well for both companies, but mainly because independently, they are headed for the trash heap.

“This is clearly a merger to fight off extinction,” Basenese said. “Combining forces might only delay the inevitable.”

Technology business blog, the Digital Home, called Blockbuster’s proposal “laughable.”

“Blockbuster is nothing more than an irrelevant shadow of its former self. For years, the company stood atop the rental business and destroyed any and all competitors in its path,” Digital Home author Don Reisinger wrote. “But once Netflix saw it fit to change the way the rental business works, Blockbuster couldn’t adapt and its once booming business turned into an overpriced cesspool of old business models.”

A 2008 M&A Revival

A recent report from Thomson Financial indicated that the global volume of M&A plunged 31% to $661 billion in the first quarter of 2008. But that drop-off comes after a banner year for M&A activity. Total global deal volume checked in at $4.5 trillion in 2007, up 24% from the previous high-water mark set in 2006.

Since then, credit conditions have tightened significantly as many banks were badly burned by credit defaults. But while an era of “easy money” has come to an end, there is still ample opportunity for takeovers and tie-ups.

Basenese attributes most of the drop-off in M&A to a shift in the balance of power. Over the past several years, private equity firms had established themselves as the main drivers behind M&A activity by outbidding companies for assets.

However, it was those same buyout firms that led to the collapse in first quarter deals, with a 77% drop in acquisitions. And that has opened the door for companies flush with cash to get back down to business.

“Corporations are sitting with almost near record amounts of cash on their balance sheets,” Basenese said. And with that, they can “take advantage of the depressed stock prices of competitors without the fear of being outbid by overly aggressive private equity shops.”

Deals on the Docket

Microsoft made its move with an unsolicited $44.6 billion bid for Internet portal operator Yahoo! Inc. (YHOO). So far, Yahoo has done its best to thwart Microsoft’s advances, but most analysts believe Microsoft will get its way if it ups its $31 a share offer.

If that buyout goes through, it will be the largest-ever acquisition in the high-tech sector, exceeding even Kohlberg Kravis Roberts & Co.’s $26 billion buyout of First Data Corp. However, Yahoo’s explicit opposition to the takeover makes it impossible to rule out a narrow escape.