Will this holiday season secure our economic recovery? Retail companies are anxiously awaiting the end-of-the-year buying spree and hoping for some big numbers to balance out their recessionary losses.
The true test of the economic recovery is fast approaching: The holiday retail season.
Most retailers are offering gloomy outlooks. Abercrombie & Fitch saw same-store retail sales fall 27% this year, with little reason to expect a turnaround.
Macy’s has seen same-store retail sales fall 3.6%, with the more-important revenue numbers decreasing 3.9%. Although Macy’s lost less money this year than last – and even with an expected increase in holiday shoppers – spending remains “fragile.”
Karen Hoguet, Macy’s chief financial officer, recently said on a conference call, “… there are more uncertainties than usual in this environment.”
Even Wal-Mart – one of the supposed winners in the current belt-tightening environment – is hurting. Same-stores sales are down 0.4% at the retail giant, despite an increase in customer traffic.
But the market may be getting mixed signals from the retail sector…
Mixed Messages
The Commerce Department released the October retail sales report Monday morning and, on the surface, the report provided a much-needed boost that the U.S. consumer is returning to pre-recession spending patterns. However, the report warranted concerns once the revised data for September was announced.
The Commerce Department’s report said total retail sales increased 1.4% in October, the largest advance since August when the Cash for Clunkers program was in full production. The government also released the revised data for September, which showed retail sales had decreased 2.3%. Sales were previously reported to have dropped by 1.5%.
Wall Street economists had forecasted a jump of 0.9% for retail sales in October, and a 0.4% increase when excluding autos and parts. The ex-autos report showed a benign 0.2% increase.
October’s retail sales report is providing optimism that the economic recovery is still on track. With 70% of Gross Domestic Product calculated from U.S. consumer spending, increases in retail sales are always applauded rather than ignored. The wild card, though, will be the recovery in the labor market to show sustainability in spending.
“Consumers are looking relatively resilient,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York to Bloomberg News, who projected sales would increase 1.3%. “They are spending a little more freely, which bodes well for the holiday season. Given the backdrop of the labor market, this is actually as good as one can hope for.”
Looking toward the holiday shopping season, this is good news…
U.S. Consumer Holiday Spending
According to RTTNews, a recent Gallop poll shows that Americans plan to spend around the same on holiday gifts this shopping season as they did last year. The poll, which surveyed 1,008 adults, states the average amount Americans expect to spend during the upcoming holiday retail season is $638.
This compares to the $705 average last year.
With only 34 shopping days remaining until Christmas, economists and analysts are projecting a very soft holiday spending season. Considering over one-half of all retail revenue for the year occurs between Thanksgiving and Christmas, any hiccup in spending patterns could have an unprecedented negative effect on retailers quarterly earnings.
The reason for concern isn’t so much that the spending appetite has subsided; it’s because shoppers do not plan on using credit cards this season (or are choosing not to). Cash is king, and if would-be shoppers are limited in that department, there could be many retailers wondering if the Grinch stole Christmas.
According to a survey released by the National Retail Federation (NRF) yesterday, the number of U.S. shoppers planning to use credit cards this holiday season is expected to decline 10% this year, making up 28.3% of shoppers versus 31.5% last year. Cash as a payment method is making up the difference, with a quarter of overall holiday shoppers expecting to only use their dollars, up 9.1% from the 2008 holiday shopping season.
“With many holiday shoppers focused on spending within their limits, it’s no surprise that fewer people will be relying on credit cards this year,” said Tracy Mullin, chief executive of the NRF, in a statement.
Retailers Fight for Consumers
Poor economic factors are contributing to a push by U.S. retailers to help incite shoppers to their stores. There have already been several pre-black Friday sales events by major retailers to help motivate the public into opening their wallets, and many more are widely expected.
“If the strong promotions and sales we’ve seen the last few weeks are any indication of what retailers are planning, shopping on a budget this year will not be a problem,” added NRF CEO Mullin.
Black Friday is the day after Thanksgiving earmarked as a shopper’s day in paradise.
Black Friday traditionally marks the day U.S. retailers make enough in sales to put them financially in the black for the entire year. You can get a sneak peek at the savings at BlackFriday.info, a Web site that lists sale items from major retailers specifically for Black Friday. The site shows:
- $400 Toshiba 16-inch laptop (Intel Core 2 Duo chip, 3GB RAM, 250GB hard drive) from Best Buy
- $250 Acer 11.6-inch netbook (Intel Atom Z520, 2GB RAM, 250GB hard drive) from Radio Shack
- $380 Acer Aspire 15.6-inch laptop (AMD Athlon X2 Dual-Core L310, 4GB RAM, 320GB hard drive) from Office Depot
The NRF says retailers are offering deals earlier this year in hopes of generating more revenue. According a NRF survey on the U.S. economy, consumers are expected to spend a little less during the 2009 holiday shopping season. Per the survey, U.S. consumers plan to spend an average of $682.74 on holiday-related shopping, which is a 3.2% drop from last year's $705.01.
To offset soft sales, retailers are cutting inventories. That in turn means any high-in-demand items will be hard for consumers to get… and could actually cost more money.
The Look Ahead
Poor sentiment readings and a larger-than-expected revision to the downside for September may provide cautionary signs the upcoming holiday shopping season may be more dire than previously expected. Seeing that back-to-school shopping was a complete disappointment does not bode well for seasonal shopping numbers.
If there is hope for the holiday retail season, it’s in the consumer confidence numbers. After falling off a cliff October last year, and hitting all-time lows in March, consumer confidence has recovered somewhat. The current level – just below 50 – is still on the low side historically, and has actually taken a dip over the past month after a strong six-month recovery.
But there’s no doubt that retail consumers appear more willing to spend now than they did at the start of the year. Still, just as last year, the fear is retail consumers will still buy gifts – but will opt for smaller-ticket items.
Regardless of predictions and expectations, we’ll soon have the facts. Black Friday is a week away – and once the holiday retail season truly takes off, we’ll have a much better idea of how healthy – or unhealthy – it will be. And, consequently, we’ll have a much better idea of what 2010 will bring.
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