Six Reasons Why it May Be a Jolly Christmas

Believe it or not it is time to start to think about Christmas sales. This is the season when retailers start to indicate amounts and prices for Christmas goods and early indicators of retailer orders are relatively strong and seem to be gaining momentum. While Christmas is still nine months away, because of design, production, transportation and distribution lead times for consumer goods, it is the spring season when retailers try to figure out what is going to be hot and what to order for Christmas. This year the advance and anticipated order book for manufacturers of Christmas items isn’t bad and actually looks like an improvement over 2008. There is a general feeling among surviving retailers that they are going to see some pent up retail demand unleashed in the 2009 Christmas selling season. Even better, retailers are talking about orders to satisfy increased same store sales when compared to 2008.

My opinion regarding retail orders is based upon portfolio data from the companies that First Capital finances. First Capital lends money to literally hundreds of companies producing consumer goods that are sold in the retail distribution chain. And, First Capital’s credit department researches and talks to management of all of the major retailers and most of the smaller regional and specialty retailers. First Capital’s view of retail sales does not include consumer durables, toys or food products. However, within the apparel, textile, soft goods, furniture and electronics sectors, we are seeing an unmistakable trend toward the advanced Christmas order book indicating at least a modest anticipation of an improvement in consumer demand.

AP recently ran a story that is in stark contrast to my guardedly optimistic view of Christmas retailer sentiment. AP used very cautionary language and suggested that Christmas goods were being ordered in lower quantities than in past years. I can’t explain the wide disparity between what AP reported and what First Capital is witnessing.

Increased orders by retailers don’t mean that there will be increased retail sales. It only means that retailers are stocking their shelves in anticipation of consumer demand. Also, the relatively early start to the Christmas production cycle means that retailers are trying to make sure that they aren’t crowded out by their competitors. If the trend continues, there will be more “stuff” to buy this Christmas which is helpful news for the manufacturing sector both in the U.S. and abroad. However, if retailers are wrong and demand is weak, retailer sales and profits will be down and a lot more stores will go out of business.

I believe that there are several reasons for the slightly positive outlook by retailers.

First, retailers believe that there is considerable pent up demand for consumer goods. Some of the anticipated pent up demand is from a need to replace worn out and obsolete merchandise. And, some of the pent up demand is anticipating that consumers will “splurge” a little after a few tough shopping cycles when many shopaholics showed restraint.

Second, according to the U.S. Census Bureau the population of the United States grows every year by almost 3,000,000 people. All of these new residents create a lot of new internal demand for goods and services. That means every year the population grows by about the number of people that live in Chicago, which is the U.S.’s third largest city. By the time Christmas 2009 rolls around there will be almost 6,000,000 more people in the U.S. than during Christmas 2007. Given the U.S. population growth, retail sales cannot keep on trending down forever and retailers are betting that Christmas 2009 sales will reflect the large number of new American consumers.

Third, many retailers think that discretionary income among employed workers has started to rise and will continue on an upward trend. While rising unemployment is hurting overall discretionary income, a combination of low overall interest rates, really low mortgage rates, reduced costs to rent or buy housing and low energy prices are propping up discretionary income for most families that haven’t been hit by layoffs. Retailers are betting that this trend toward increased discretionary income among the employed will help sales.

Fourth, when the fiscal stimulus plan kicks in most retailers anticipate that demand will rise. If the fiscal stimulus works as planned, discretionary income for many families will get an extra boost and increased spending will follow. Also, many retailers anticipate that unemployment will stabilize and then start to fall as a result of higher government spending. Higher numbers of employed workers will stimulate demand for retail goods.

Fifth, housing and autos don’t seem to be getting worse which is providing some level of stability to the economy. Of course, when production and employment in autos and housing drops really close to “zero”, stability is easy to achieve since zero is a lower end boundary.

Sixth, retailers are hoping that the recent public policy actions of the Fed and Treasury to finance consumer and small business loans will free up consumer credit to finance new purchases. It’s great to have low interest rates but if consumers can’t borrow low interest rates are irrelevant. Retailers hope that the Fed and Treasury programs actually deliver these low interest rate loans to consumers and small businesses so that they have access to credit to purchase goods and services.

While it is too soon to say that the Grinch will not be stealing Christmas, retailers are betting that at least he will be staying in his cave.

Comments

[Larry House:]

Cetin, you are very consistent, but you are not convincing. I am fully invested, so I am not hiding in cash, but your blind optimism is misguided. Do you understand what is happening to consumers and credit? Credit limits on credit cards are being lowered. Banks don't want to make home equity loans. A CHANGE is taking place! Economic activity is NOT going to jump right back to the way it was. Savings rates will NOT go negative any time soon. People have lost about 40% of their invested money. That is not a good backdrop for spending. It is fine to be positive, Cetin, but you can't ignore the evidence in making conclusions--at least if you want to be taken seriously.

Apr 01 05:15 PM

[logicalman:]

at least 6 months b4.....wall of worry.....need i say more..get with it Larry!!!


On Apr 01 05:15 PM Larry House wrote:

> Cetin, you are very consistent, but you are not convincing. I am
> fully invested, so I am not hiding in cash, but your blind optimism
> is misguided. Do you understand what is happening to consumers and
> credit? Credit limits on credit cards are being lowered. Banks don't
> want to make home equity loans. A CHANGE is taking place! Economic
> activity is NOT going to jump right back to the way it was. Savings
> rates will NOT go negative any time soon. People have lost about
> 40% of their invested money. That is not a good backdrop for spending.
> It is fine to be positive, Cetin, but you can't ignore the evidence
> in making conclusions--at least if you want to be taken seriously.

Apr 01 05:24 PM

[Moresby:]

You are being very optimistic is forecasting what may happen in Christmas......
A week is a very long time at the moment....
The upside.... you have 50% chance of being right and if you turn out to be wrong, who is going to remember?

Apr 01 05:47 PM

[Karen Consumer:]

"My opinion regarding retail orders is based upon portfolio data from the companies that First Capital finances. First Capital lends money to literally hundreds of companies producing consumer goods that are sold in the retail distribution chain. And, First Capital’s credit department researches and talks to management of all of the major retailers and most of the smaller regional and specialty retailers. First Capital’s view of retail sales does not include consumer durables, toys or food products."

So do you own them or work for them (First Capital)?

Seriously, unless First Capital is the only company that loans to producers, I don't see how you can predict Christmas sales based on this.

Apr 01 05:49 PM

[bs_o_meter:]

There is a clear and consistent message coming from the bull$hit for lunch bunch over exaggerating of the positive events about the market and economy. I hope no airheads actually start believing this spin as truth. Cetin, get a life.

Apr 01 09:58 PM

[wise:]

you are saying on the margin things have turned, and we have heard that from others. This is the anecdotal evidence that in my 50 plus years of past observing, has signalled the turn sooner than government statistics

Apr 01 11:34 PM

[mac.barron:]

First of all what the hell good is another six million brokeass people to the economy? Unemployment is going to keep going up and wages are going to keep falling because business knows that workers still employed are glad for their jobs and can be more cheaply replaced if they start to ask for raises.

That bit of obviousness aside I agree with the comment that Moresby made above. Right now a week can be a long time. Before the end of the year the U.S. Government could create by fiat and throw several more TRILLION dollars at the black hole of an economy we are now running. that means that, against all logic, we could have a "good" Christmas for retail sales even with the unemployment we are now facing.

Right now smart money is trading the up and downs of the markets--calls going into up cycles, puts into slumps. Really smart money is looking two to five years down the road and getting hedged into commodity plays and emerging markets where inflation will be under control when the U.S. Dollar starts to crap out.

Apr 02 01:48 AM

[Phil Trupp:]

We are patiently waiting for a return of Jimmy Carter interest rates of 12-14%. It is coming, and it will be very bad for equities. But when the coming inflation peaks, forget equities, go long on treasuries--and relax for a while.

Apr 02 11:45 AM

[Stocking Fa...:]

We are one of the Christmas retailers using the exact strategy you have observed. We sell personalized Christmas stockings and Christmas ornaments exclusively at www.centrinet.com/chri...

This year we are ordering more inventory than ever. I have described the reasoning for this move in our blog a few days before you have published this article.

In summary: we realize our customers will have rough time in 2009 so we are going out on a limb: purchasing larger inventories in more SKUs to afford the consumer better selection at the most competitive price point possible.

I would like to label ourselves as one of the "surviving retailers". Our sales in 2008 showed modest growth over 2007! We determined in Jan/Feb 2008 that the recession is inevidable so we initiated the strategy of purchasing more at lower costs to pass the increased savings onto the customer, it paid off. This strategy worked so we are expanding on it.

Apr 03 12:00 AM