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‘Tis the Season to Ring Up Sales
There’s nothing like festive decorations, cheerful holiday music, throngs of people moving about, and the shuffling sounds of shopping bags that says it’s that time of year again. With the winter holiday season in full swing, and the hustle and bustle seemingly picking up at the malls, it appears people are busy shopping. Or are they? True, specialty retailers have seen sales (comparable-store sales, to be specific) improving in recent months, and trends suggest that business should be good through the holidays, too—a crucial time for retailers, since the lion’s share of sales and earnings is registered then. Considering that many retailers emerged bruised and battered from the 2007-2009 recession, any uptick in sales during the holiday stretch would be a blessing—and enthusiastically applauded by Wall Street.
But it seems the bar has already been set high for the quarter, which if not reached, could cause retail stocks to slide. Interestingly, in the weeks preceding the holidays, many retailers have turned to discounts and special offers to draw customers into their stores. To see promotions this early in the season is unusual, however, since customer traffic is typically driven by “gift-giving”, not money-saving offers. Indeed, although retailers traditionally kick off the holiday shopping season with Black Friday, one of the busiest days of the year, it seems promotions have continued well into December, which could be of concern.
A slew of mall-based stores including Ann Taylor (ANN), Bebe (BEBE), and even Aeropostale (ARO), a winner with its value-priced casualwear for teens, have offered their merchandise at steep discounts following Black Friday.
On the flip side, specialty teen retailers Abercrombie & Fitch (ANF) and American Eagle Outfitters (AEO) have done surprisingly well lately, with sales bouncing back. So far, both have been keeping promotional pricing at a minimum going into the season. Moderately priced department store chains, such as JC Penney (JCP) and Macy’s (M), shouldn’t have much of a problem attracting shoppers with fewer discounts ahead of the festivities.
Nonetheless, the retail environment likely is not as strong as it is perceived to be. From the looks of it, consumers are holding back, and retailers are hoping to entice them with bargains. While shoppers have loosened their pursestrings in recent months, they still appear to be exercising some restraint with discretionary spending. Given the backdrop, that’s hardly shocking.
The macro picture tells a somewhat conflicted story. On the one hand, the overall economy seems to be on the mend, with economic indicators suggesting things are moving in a positive direction. In fact, according to the U.S. Department of Commerce, retail sales rose 0.8% in November, surpassing expectations and making that the fifth consecutive monthly sales gain posted. After stripping out the decline in auto sales, retail sales increased 1.2% for the month. The data seem to imply that consumer spending (which makes up more than two-thirds of GDP) is improving, and that the economy will continue to grow at a sustainable pace, auguring well for retail sales in the months ahead.
Meanwhile, consumer confidence (a key barometer that gauges the public’s sentiment on the economy and its direction) has been sending additional signals that holiday retail sales should get a boost. The Consumer Confidence Index advanced to 54.1 in November, from 49.9 in October. The reading, which is the highest in five months, reflects increased optimism among consumers regarding job-market prospects and business conditions for both the near term and the long haul. Note, though, that a figure of around 90 denotes notable economic improvement.
On the other hand, some parts of the big picture suggest the economy is not in the best of shape. And this could well hurt retailers through holiday time and into the new year. The grim unemployment situation remains a major issue, one which may keep consumer spending subdued. This could translate into a disappointing holiday season for retailers. Indeed, the jobless rate clocked in at 9.8% in November, up slightly from the month before—not a very reassuring sign. Unrelenting weakness in the housing market and fairly tight credit are other factors that will likely limit the buying power of consumers this season.
Retailers might just wrap up the all-important holiday quarter with “decent” totals. Still, that could ultimately leave investors with a chill as sales and earnings fall short of lofty expectations.
At the time of this writing, the author did not have positions in any of the companies mentioned.