Black Friday: Will Americans Shop?

By Nestor Solari

What does this Friday mean for the market? Since 1965, Black Friday has meant huge traffic jams and over-crowded stores and malls. This year may be a little different, as macroeconomic conditions become visible with smaller volumes and shorter lines, which of course mean more inventory that could eventually lead to a decline in retailers' profits.

This bellwether day of holiday sales is likely to determine the fate of many in the retail sector, which has been suffering this year. Businesses have been failing - the most recent case being Circuit City (CCTYQ.PK) filing for Chapter 11 - and it seems that the economic environment is only getting worse. Analysts are projecting the worst Q4 in almost 35 years, and many retailers are taking steps to survive the crisis. The sales during the holiday season accounted for almost 40 percent of total sales last year, and the Friday after Thanksgiving accounted for approximately 15 percent of these revenues.

Survival of the Fittest

“The new fashion is frugality,” according to Stifel, Nicolaus & Co. analyst Richard Jaffe. With the average amount customers spend down 3.5 percent in 2007, even with traffic up 4.8%, and consumer confidence at historical lows, businesses will really have to step up this year. Macy’s, Inc (M) already had their deepest discounts of the year a week before the biggest shopping day of the year, and Kohl’s Corporation (KSS) also had its three day sale which ended on Turkey Day.

Simon Property Group (SPG) which operates many malls and outlets, announced that it will open over 40 of its locations at midnight, in an attempt to increase the 14.3 percent of customers that were bargain hunting before 4:00 am a year ago. Many analysts are saying consumers may be holding off as long as possible to take advantage of more competitive pricing from retailers later in the holiday season. These deep mark downs sound great for the consumer, but mix this with heavy inventories and it spells out pressure on margins for retailers. Slower sales of higher margin items like the flat screen televisions and other electronics could mean trouble for these merchants.

Consumers and Cyber Space

Analysts expect consumers to spend 29 percent less on Holiday gifts this year, which signals that shoppers are looking to cut spending in any way possible. According to comScore, 39 percent of consumers polled said they would turn to online purchases to save money on sales tax and take advantage of free shipping. Although internet shopping is becoming increasingly popular, it is also down holiday season to date. So far this season consumers have spent $8.2 billion online, down 4 percent from last season. Sales are projected to pick up through the end of the year, but remain flat in comparison to last year, down from the 19 percent growth in online shopping revenue from 2006 to 2007. Things are looking grim from all angles.

Recap

If you are looking for a good balance of risk and return to invest in, look elsewhere if you ask me. The S&P Retail index has underperformed the broader market, and all signs point to it falling further. What happens this Black Friday will mean a lot for the sector going forward and is something to watch closely. Disposable income has been tight and is only getting tighter for the time being. Ten straight months of job losses are not going to cause consumers to spend more. The results of this weekend mean a lot to the results of this quarter. Happy Holidays… or so we hope.

Disclosure: No positions

Comments

[Roger Knights:]

I think there's a typo in:
"down 3.5 percent in 2007"
Didn't you mean 2008?

2008 Nov 28 06:35 AM