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If you ask the Wall Street Journal, the consumer spending glass is half empty. I disagree and interpret the numbers differently, as this holiday shopping season is estimated at a 6.6% increase over last year's. This is a materially large gain compared to inflation in my opinion. The Journal article bases its well documented case on comparisons to last year's 8.7% increase.

Holiday spending between Thanksgiving and Christmas rose a disappointing 6.6% over last year, according to SpendingPulse, a retail-sales data service from MasterCard International's MasterCard Advisors Unit. Last holiday, sales climbed 8.7%. "People were expecting a lot more momentum," said Michael McNamara, vice president of research and analysis for MasterCard Advisors. "Retail sales are growing, but at a more moderate pace compared with last holiday."

The bigger picture here in my opinion is that the American consumer is demonstrating growth by still spending at a rate that well exceeds inflation. Exceeding 8.7% is not a preference for those of us Fed watching, concerned about inflation, wages and therefore interest rates.

I am paying particularly close attention to post Christmas sales, which are all too predictable. The big purchase this year at my house will be a new LCD TV. My kids were more than willing to wait for the big post holiday sales for our purchase. This mark down mentality has got to hurt margins at some retailers and therefore profits. When discussing business variables, most analysts are referring to costs such as advertising and additional holiday labor. What the "variable" shouldn't be, which we see all too often these days, is variable revenue, where the percent mark down is the variable, therefore moving quarterly revenue and margin numbers. This will be reported at earnings time and most easily measured in operating margins, which are already as low as 4.48% at department stores. Not all retailers are playing this game. New merchandise is one way to play it.

Many stores are putting out fresh spring products hoping to sell them at full price to shoppers brandishing gift cards. Sales of gift cards are expected to total $25 billion this holiday, $6 billion more than last year. Best Buy Co. said it had already racked up more than $1 billion in gift cards by last week.

The high end of the market also seems to be doing OK without the discounts, and not just in NY and Fairfield County, CT, where the Wall Street and Hedge Fund bonuses are fueling purchases.

Last week, Hermès at South Coast Plaza, in Costa Mesa, Calif., sold a $140,000 Birkin bag with a diamond clasp while Pioneer Electronics sold out of its stock of $1,500 Blu-ray videodisc players. Six thousand shoppers blitzed through a Tiffany & Co. store on Wednesday and Thursday, while Louis Vuitton was among the busiest stores in the plaza, according to the center's executive director of marketing, Debra Gunn Downing.

"It seems to me like everybody is buying," said Ron Heller, a Mercedes-Benz dealer in Boerne, Texas, who was clutching a Ralph Lauren shopping bag -- holding a gift for his girlfriend -- Saturday night at a Neiman Marcus in San Antonio. "I have been to four or five luxury stores tonight and they all seem to be full. With the Dow hitting an all-time high, I think that there's a paper wealth that a lot of us are feeling."

There is, of course, a big online component to this story, as Nielsen/NetRatings announced that visits to the Holiday eShopping Index grew 20% this season for the week ending 12/10, from 469 million to 563 million.

Shopping destination sites are as below.

Top Online Shopping Destinations

The bottom line is that this was a good year, and as always, a year with distinct winners and losers. When investing utilizing revenue and traffic information, there are several questions to ask:

  • Is the company growing faster than its peers?
  • Is this a turnaround situation for growth or earnings?
  • How well are the sales increases being managed, meaning discounts and advertising versus word of mouth and brand? It is all about costs. Is the company really making money or just moving merchandise?
  • Do I want to invest in distribution (retailers) or manufacturers (like Apple (NASDAQ:AAPL))?
  • Strong operating margins lead to profits, leading to surprises in earnings reports. Many traders prefer top line to bottom line growth but firms like mine, which are mid to long term investors, seek a history of both.

    Source: An Optimistic Outlook On Consumer Spending