Christmas Sales Numbers Should Surprise to the Upside

The Pittsburgh Post Gazette this week reported on the latest figures from the National Retail Federation that concluded spending in the months of November and December (excluding cars, gas and restaurants) should hit $437.6 billion. That compares to $441.97 billion in holiday 2008 spending, and $457.75 billion in 2007. If correct, this year will mark the slowest holiday season since 2005, when sales totaled $433.66 billion, and it would be the first consecutive decline in 40 years.

From the Pittsburgh Post Gazette:

Other forecasters are offering slightly different projections but they generally agree on certain issues: Consumers will be drawn to discount retailers, will buy practical gifts and will stick to the budgets and coupon-clipping ways that have become ingrained over the past year. Many retailers are braced for it.

"The expectation of another challenging holiday season does not come as news to retailers, who have been experiencing a pullback in consumer spending for over a year," said Tracy Mullen, president and CEO of the retail federation in a prepared statement. Despite some signs the official recession could be over, the trade group noted continued uncertainty over housing values, jobs and even the stock market have done little to convince consumers that a recovery is solidly in place.

Still, "I think we were a little bit surprised that those numbers didn't come in worse," said James Russo, vice president, global consumer insights at the New York-based Nielsen Co. That organization last week predicted overall holiday sales would be almost flat this year.

Although it runs its calculations a bit differently than the retail federation, the findings don't conflict. The research company found 85% of households planning to spend the same or less this year than last, with a 7% increase in the number planning to cut back. Nielsen found consumers expect to spend more in one category -- gift cards. Mr. Russo said a growing number of shoppers plan to give gift cards to grocery stores as gifts. Talk about practical.

Meanwhile, Wilkes University business professor Anthony L. Liuzzo is sticking to his forecast, made in August, that overall holiday sales will rise 2%. "It seems that things are going the way we thought they would," said Dr. Liuzzo. "It's not terrific but it's better than last year." He agreed with the other observers that retail inventories are tight and he recommended consumers figure out what they want and start shopping long before Thanksgiving. "I think retailers generally are kind of underestimating as a rule," he said, predicting some popular colors of clothing or certain toys could be out of stock early.

But there may be deep discounts on some items for those who wait, according to the National Retail Federation. The group said retail battles for sales in areas such as apparel and electronics could create deflation because of aggressive sales.

Christmas sales have been feeling the impact from a changing demographic landscape even before last year's 3.4% decline. The writing has been on the wall since 2005, as Baby Boomers and their buying habits started to leave the "Christmas Mall" to be replaced by the more value driven Generations X, and in particular, Y.

We believe that retail sales in the key November and December period, on balance, will surprise to the upside by about 1% to 2%. However, there will be winners and losers, with demographically favored retailers offering "value" to their cohorts being best positioned to reap good sales numbers.

Retailers targeting teenagers and children (especially those offering gift cards and discounts through coupons), those pushing Boomer health products (to make them look and feel younger) and those utilizing E-commerce should have a bumper year. Potential winners in the first category would include Ross Stores Inc. (ROST), Aerospatale (ARO), Pacific Sunwear of California (PSUN), Quicksilver (ZQK), GameStop (GME) and Children’s Place Retail Stores (PLCE). In the Boomer health category we favor Ulta Salon, Cosmetics & Fragrance Inc. (ULTA) and Nu Skin Enterprises Inc. (NUS). And for e-commerce we believe Amazon.com (AMZN) has the edge, while Apple Inc. (AAPL), with its iTunes Store, should also see good holiday sales.

Source: Ned Davis Research

As for the behemoth of retail, Wal-Mart (WMT), we believe the closely followed retailer will, by its own high standards, have a disappointing Christmas season.

We would argue that the retail sector's valuations have yet to price in an economic recovery or the potential for a positive Christmas season. Best Buy's (BBY) price to sales ratio of 0.3 is considerably below that of its 2003 to 2006 average of 0.7, and even the sector's current darling, Aerospatale's, has a P/S of 1.4, below its 2004 peak of nearly 2.0.

So, no worries. Santa Claus will still come down the chimney this Christmas, so keep a close eye on share price performance, and by early December we should know the season's winners.

Disclosure: No positions, but ROST, GME, PSUN, AAPL, ZQK and AMZN have been featured in our model portfolio.

Comments

[tripleblack:]

I believe that Christmas giving this year will be surprisingly strong, but that much of it will be in the form of cash. As families in economic stress are recognized by loved ones in better shape, this sort of tactful handling of a helping hand without damage to tender pride will be commonplace.

Ergo, the post Christmas sales may be higher than projected.

I would agree that the current numbers might miss 1 or 2% low.

Oct 06 05:16 PM

[market ace:]

I guess retailer groups cannot face reality and If there are any Christmas sales this year that should be a surprise. If consumers still have not learned their lesson then let the good times roll again and the credit cards bulge with even more debt as incomes have shrunk dramatically since last year.

I think there may be a little pent up demand for some necessities, but let's not get carried away and think people will really be buying that second 74" flat screen for the bathroom.

When we are even going to count gift cards to grocery stores as Christmas shopping. That sounds pretty desperate to me.

Oct 06 05:31 PM

[reagan:]

Apple will hit it out of the park! Going to be huge!

Oct 06 06:05 PM

[NDinMSP:]

Contrary to what makes interesting television, not every single person in the country is flat broke.

Oct 07 01:57 AM

[Mr. Ed, Jr.:]

Yet.


On Oct 07 01:57 AM NDinMSP wrote:

> Contrary to what makes interesting television, not every single person
> in the country is flat broke.

Oct 08 02:38 AM

[Master Che:]

I could't disagree more with those projected holiday sales. It just goes to show how powerful the propaganda machine is. Sales will come in between 325 billion to 375 billion

Oct 08 07:13 AM

[bottoms-up:]

Well... Her's a question for everyone on Seeking Alpha...

Weeks before this earning season kicked-off there were numerous articles about how thing would be "better than expected." Sure enough, report after report is better than expected and the stocks jump.

Now we are getting a report in early October that holiday sales will be "better than expected."

Now then... If you are predicting in October that it is going to be better than expected, how can it be "better than expected"? You are already saying that you are expecting a specific level of holiday sales... You are expecting it.... Same with all of these reports...

The phrase "better than expected" is just the newest Catch 22 in this economic sham run by Ben and Tim.

Oct 08 09:27 AM

[bottoms-up:]

Massive loss of consumer credit, massive loss in all asset classes, massive job losses...

When you say "not every single person" is broke... Correcto mundo... Just look at the bank execs who got bailed-out...


On Oct 07 01:57 AM NDinMSP wrote:

> Contrary to what makes interesting television, not every single person
> in the country is flat broke.

Oct 08 09:31 AM

[djackson:]

It's not just the level of sales, you have to be cognizant of margins. From yesterday's WSJ blog:

Wal-Mart Stores Inc. (WMT) is seeing more consumers living very close to the bone, with government assistance programs its fastest growing payment method and customers arriving at stores at midnight on the first of the month, when their paychecks or relief payments come in.



1:20 (Dow Jones) Target (TGT) joins the Christmas toy wars, cutting toy prices by as much as 50%, including GI Joe’s that will now go for $14.99 and Barbies for $5. The move follows Wal-Mart (WMT) saying last week it will offer more than 100 toys at $10 during the holidays and Toys R Us making a big Christmas push as well. TGT up 0.2% to $48.20. (KJT)

See that? It’s what, Oct. 7, and Target and Wal-Mart are already fighting for holiday sales. Not just setting up their strategies, not planning their pricing platforms, but they’re already slugging it out in the aisles. Forget that Christmas is nearly three months away; these guys don’t have three months to wait for you to buy a GI Joe.

So discount retailers are discounting even further to draw in customers, many of whom who have to wait until their assistance checks clear to go shopping. Now, of course most people have jobs. But most people had jobs during the Great Depression, too.

Oct 08 09:32 AM