Preparation began months ago on my end to begin thinking through scenarios for the upcoming holiday season. Talking to management teams, Google-searching anything related to holiday and retail, and scouring the web for retailers that are trying to play Santa in August. Thus far, the mood in the marketplace is one of gloom for the biggest chunk of a retailer's annual sales and earnings, and let me tell you the dark period in executive commentary has not helped to dispel fears. The organizations that release holiday sales forecasts have generally adopted bullish stances, though I always question their figures and instead opt to place more emphasis on what my contacts are saying and dot connecting via countless conference calls.
There are a couple of anecdotal tidbits that I feel are worth mentioning ahead of today's consumer-oriented data frenzy, headlined by September retail sales (August was a disappointment, July was revised lower) and then followed by the Michigan sentiment report after the market open.
1. Activity at key ports has been subpar to the point where there was no typical peak in in-bound containers. To go without a peak season is troubling as it indicates cautious order planning for one of two reasons: (1) inventories at the present are elevated as a result of the August consumer hiccup; (2) companies have zero visibility into future demand and prefer to "chase" unexpected demand. Product chasing is a risky strategy (pay higher costs to fly goods from China; risk out of stocks and disappointed consumers), so to learn that it's happening suggests current business trends are worrying enough to warrant the future risk. The ports are not the only ones spinning a tale of holiday stocking coal, railroads have also issued tepid commentary on the shipment subject. Two strikes in the eyes of the holiday season buff.
2. Holiday hiring plans flat out stink. Yes, technology advancements and a reallocation of payroll to support online are factors, but management teams would rather do more business with less overhead initially and then hire if the season is trending better than expected.
3. Last Monday I dropped in on Target (TGT) running a Cyber Monday program online. Huh? This is October, right? I smell the fear in the air with a program such as this, and it coincides with others bringing in holiday merchandise weeks earlier than one year ago.
In terms of making a broad call on retail, I would offer this insight: Proceed with caution and pick your spots. If 2011 has taught us anything, it's that the consumer spends on that absolute want, and is willing to tap savings and add a balance on the credit card to satisfy the rush of buying something new. Moreover, they only consume when they absolutely must. So look for those companies serving up those wants and stay clear of companies competing on price (say, like some department stores).
By: Dave Urani, Research Analyst
Retail sales during September increased by 1.1%, representing the biggest month to month increase since that reached in February. It makes sense that September would be better than August due to all of the mayhem that month, but the magnitude of the increase was encouraging. The consensus was looking for an increase of 0.8%. There was a 3.6% increase in autos and parts which was a main driver, but excluding auto sales were up 0.6%, beating the 0.4% consensus estimate.
Other areas of note were gasoline stations which were up 1.2%, and clothes & accessories which were up 1.3%. The market reaction to the report was great, and looks to have added about another 30 points to the Dow this morning. This is another reminder that although recently it has seemed like the sky is falling, economic activity is still churning in positive territory which will make investors question the low value of equities at the moment.