The final shopping days of the holiday season are rapidly approaching, and, fortunately for retailers, the timing coincides with a stock market that has soared to all-time highs and consumer confidence that has jumped in the wake of the presidential election.
Jackie rang Craig Johnson, founder and president of Customer Growth Partners, a retail research and consulting firm, to hear what he’s seeing on retailing’s front lines. Craig and his staff wander the aisles of malls and retailers across the country to get a feel for what’s selling and what’s not. You can listen to a podcast of their conversation, peruse a transcript, or read on to get Jackie’s condensed version of Craig’s insights and our take on how retailers are wrapping up the year:
(1) Forecasts abound. Every year, retail analysts try to divine just how strong or weak the holiday selling season will be. This year’s consensus estimate is about 3.5% y/y growth. Be sure to note that estimates below don’t all include the same items. Here’s a quick rundown:
(i) The National Retail Federation expects November and December sales, excluding autos, gas and restaurant sales, to increase 3.6% y/y, higher than the 3.2% increase in 2015 and the 2.5% 10-year average. Its forecast includes bricks-and-mortar and online sales.
(ii) The International Council of Shopping Centers predicts a 3.3% y/y increase in sales at physical stores in November and December, compared to 2.2% in 2015.
(iii) Deloitte’s retail and distribution practice expects total holiday sales, excluding motor vehicles and gas, to increase 3.6%-4.0% in November through January. Its forecast includes sales in stores and online.
(iv) Consumers told PWC that they plan to spend 10% more this holiday season, an average of $1,121 each. Those with annual household incomes less than $50,000 said they will increase their percentage spending levels even more than 10%. Shoppers said they would spend 42% of their holiday budget on travel and entertainment and 58% on gifts.
Craig is a touch more optimistic than most. He now expects November and December retail sales to rise 4.5% y/y, which is higher than his 4.1% initial forecast made in mid-October. His forecast excludes sales of autos, auto parts, fuel oil, gasoline, and at restaurants. If he’s correct, sales will best the 3.5% y/y jump last year, and it will mark the first time since 2014 that the figure has topped 4.0%. Debbie discusses below the latest data on retail sales, which came out yesterday from the Department of Commerce. November’s total, unadjusted retail sales rose 5.3% y/y, and 5.1% excluding the categories that Craig omits from his calculation.
“We saw a slow start to the season, which has been happening for any number of years now,” Craig said. “[The weakness] was perhaps exacerbated by the election uncertainty during the first eight days of November. Then, ever since the election, holiday sales have been slowly gathering momentum. It was a good, if not great, Black Friday weekend, and things have been improving as December rolls along.”
Craig’s figures include Internet sales, which continue to outpace sluggish results at bricks-and-mortar retailers. Internet sales will account for about 17.5% of total retail sales and grow by 13.5%-14.0% y/y, he estimates (Fig. 1). Conversely, in-store retail sales may climb by only 2% or a bit more. “Most retailers’ same-store-only comps are, in fact, negative. Flat at best,” he explains. “There are exceptions like T.J. Maxx and Burlington [off-price, off-mall retailers]. The off-price sector happens to be very fast-growing. But most of the rest of store-only, same-store-sales are still quite sluggish.”
Some retailers are suffering from weak mall traffic, which is flat to down 7% depending on the mall. Craig doesn’t think consumers are unwilling to spend. Rather, malls are suffering from the switch to online purchases and a lack of newness in the mall shopping experience. But that may be changing as some mall owners are bringing in new entertainment, like climbing walls and bowling, and non-traditional tenants, like Wegmans grocery stores and health care centers, that ideally will bring traffic to the malls during weekdays when business is normally light.
(2) Healthier consumers. Driving Craig’s moderately upbeat expectation for retail sales is the increase in consumers’ pocket change. Real disposable income “is the single biggest driver of retail sales and the thing that’s most correlated … and we have had decent real income growth over the last year. It is mostly concentrated in the upper half of the household income spectrum. The lower two quintiles have not really participated in things that much. Things are very, very tight there. But if you are in the upper half of the income spectrum, that is where most of the spending impetus is coming from this year.”
Real personal disposable income rose by 2.7% y/y in October (Fig. 2). Real incomes are one of a number of positive economic data points on consumers. The US unemployment rate stands at 4.6%, down from 5.0% a year ago (Fig. 3). And consumer confidence has improved. The University of Michigan’s preliminary index of consumer sentiment jumped from a 14-month low of 87.2 in October to 98.0 in mid-December--within 0.1ppt of January 2015’s 98.1, which was the highest since the start of 2004 (Fig. 4).
(3) What’s hot and what’s not. One of the hottest retail categories this year is health and beauty, which Craig expects will grow by 7.5% y/y. Driving that increase are beauty retailers Ulta and Sephora and health stores GNC and Vitamin World, which are expanding. Consumers are spending more in this category because they have more to spend in general and because they are spending less due to deflation in other retail areas, like food and apparel.
“Apparel is a sector that, on a unit-demand basis, is growing about 4% or 5%, very strong unit growth. The problem is, there’s about 3% deflation at both ends of the value chain. When you have deflation above 3% and change, that 4% or 5% nominal unit volume growth turns into dollar growth of only 1% to 1.5%. The savings that people are realizing either on the grocery side or on the apparel side from deflation is providing a source of the migration into the beauty and personal care stores.”
Within apparel, outerwear has been challenged by mild weather this fall. More recent winter-like temperatures come too late for retailers, which have already put heavy coats and sweaters on gross-margin-killing sales, he says. Hot areas in apparel include bomber jackets, off-the-shoulder sweaters and shirts, and boots, for the third year.
(4) VR for the holidays. Consumer electronics continues to be plagued by deflation, but deflation in large TVs is offset by strong double-digit sales growth. The need to buy an audio system in addition to that large TV is driving the sale of sound bars and speakers to create surround-sound in your den. “Places like Best Buy, we think, are having an excellent season despite price deflation because of the literally double-digit unit volume growth [in TVs], along with newness. We’re seeing newness, not just in the extra-big TVs, but in things like virtual reality technology.” VR headsets are breathing life into the gaming segment, which doesn’t have new gaming consoles to drive sales.
Also, sales of the iPhone 7 and 7 Plus are “charging right along.” Appliance sales were “a little bit soft earlier in the summer but have come on stronger because the housing recovery seems to be bubbling along,” he says.
(5) Jewelry sparkles. Luxury sales--both soft and hard--have done poorly over the past year. But the Trump rally may be the perfect gift for jewelry retailers. Sales of jewelry occur late in the holiday selling season because guys, the biggest buyers of jewelry, typically wait until December 15 or later to go shopping. The reason: Purchases after the 15th will likely go on the January credit card bill, which won’t have to get paid off until February, when company bonuses get paid!
“Jewelry [sales] always come late, and now with the rebound in the stock market, we think it’s going to be a very solid year for places like Tiffany, Cartier, et cetera. It’s even starting to bleed over into some of the better soft luxury players, whether they’re Hermes, Gucci, et cetera, which after a very, very slow November, are starting to see some better results,” says Craig.
(6) The numbers. The S&P 500 Consumer Discretionary sector tumbled hard at the start of 2016, and has slowly regained ground. With a ytd return of 7.5%, the sector has lagged the S&P 500 and most other sectors. Here’s the performance derby of the S&P 500 sectors ytd through Tuesday’s close: Energy (27.1%), Financials (21.4), Industrials (18.1), Materials (16.9), Telecom Services (15.4), Tech (13.8), Utilities (12.2), S&P 500 (11.1), Consumer Discretionary (7.5), Consumer Staples (3.5), Real Estate (0.7), and Health Care (-3.6) (Fig. 5).
Within Consumer Discretionary, there certainly are industry winners and losers. Department Stores, which was down roughly 20% in March, came roaring back in the second half of the year to end up 16.5% ytd. Household Appliances was strong for much of the year and is up 21.3% ytd, while Casinos & Gaming has risen 35.1%. The sector was dragged down by a 3.9% drop in Homebuilding, the 0.6% decline in Auto Parts & Equipment, and sluggish results in Specialty Stores (2.2%), Automobile Manufacturing (0.7), and Restaurants (4.1) (Fig. 6, Fig. 7, and Fig. 8).
As this year began, the Consumer Discretionary sector had outperformed all others, with a 204.7% return since the market’s low in March 2009, and was likely overdue for a breather (Fig. 9). Analysts continue to be optimistic about the sector and are calling for 5% revenue growth over the next 12 months and 9.2% earnings growth (Fig. 10 and Fig. 11). The sector sports a forward P/E of 18.6, which is toward the top end of its 10-year range (Fig. 12). With its P/E still at a premium, it’s likely that the sector will appreciate in step with earnings.
One caveat. If the Republicans’ proposed tax plan is adopted, a tax could be placed on imported goods, as Jackie discussed on Tuesday. That would cause a sharp increase in the price of goods many retailers purchase to sell. If those additional costs can’t be passed on to consumers, it could result in skinnier margins and profits and a lump of coal for retail shareholders.
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