Retailers Receive a Lump of Coal From Holiday Shoppers

Yesterday morning’s big news was the poor showing by retailers during the holiday shopping season, with retailers ranging from Nordstrom (JWN), Kohl’s (KSS), Circuit City (CC), Target (TGT) and Macy’s (M) all showing a YoY decrease in sales. In fact 10 out of the 17 retailers tracked by the WSJ showed YoY decreases in sales, especially those within the apparel segment. Although November’s chart doesn’t represent the same exact retailers, only 2 of the 17 showed YoY declines for November. One explanation for the stark difference between November and December’s sales numbers is that consumers concentrated their spending around Black Friday’s special discounts, and pulled back over the course of the rest of the holiday shopping season.

Nordstrom showing a YoY decrease in sales despite its base of high income customers indicates that those customers are either tightening their wallets, or last year’s sales were inflated by the housing “Wealth effect”/middle income consumers spending up. This “aspirational or poseur” effect is likely to impact other luxury retailers, manufacturers and sellers of high ticket items.

Wal-Mart’s (WMT) sales were in line with its estimate of 2-3% however it’s important to recognize that grocery and pharmacy sales drove well over ½ of that amount (judging by Q3s numbers), indicating that inflation played a significant part in their results. If December is any indication, a weakening consumer may be driven down market to Wal-Mart. However, it is unlikely that these “down market” customers will stay once economic conditions improve.

Costco (COST) also had strong holiday season showing a YoY sales increase of 4% (ex-gasoline) in the U.S., and 16% internationally (helped by the weak dollar). However, just like Wal-Mart Costco’s revenue numbers were also “goosed” by grocery and healthcare inflation. Costco enjoys some of the highest income customers in retail, and is well known for having higher-end items at fairly reasonable prices. It’s quite possible that some higher income customers may be looking to Costco as a way to maintain their current lifestyles and save money at the same time. Anecdotal evidence with respect to the crowds at my local Costco and discussions with friends definitely support this theory.

Target’s weak showing in December may be the result of some customers being pushed down to Wal-Mart and other customers being pushed towards Costco. Whilst a weak month during the holiday season is never good, I would hold out to see Q4’s earning numbers and the trend over the next six months before making any pronouncements about Target.

Despite the fact that Costco, Target and Wal-Mart are often seen as competitors, the fact remains that retailer has a customer base with completely different demographics around marital status, income, education, etc. However as economic conditions change consumers can be pushed between the different retailers, depending on what their financial needs/issues are. When judging the overall health of each it’s probably best to think long-term with respect to the overall performance trend, and how economic conditions will impact them over the course of 6-18 month time intervals.

Circuit City’s abysmal showing is nothing more than an indicator of a management team that is completely out of touch with its market segment and customers, when you consider the success other retailers are having selling electronics. If you can’t make money in a hot segment like electronics by selling nearly identical product line-ups as your competitors for very similar prices, it’s not the market it’s you.

CC needs a complete top to bottom overall if the company is going to remain viable. A great place to start would be to improve the customer experience within their stores. Presently, the stores often appear dark (arguably dank), they don’t often have a cashier available and you often have to go to the customer service desk to pay for your items. It doesn’t take a retail Guru to figure out that you’re not going to make much money if your customers find it difficult (if not annoying) to pay for their items.

Overall, the Christmas holiday results indicate what many have been saying for a couple of years now: the housing and consumer credit bubbles created a wealth effect that enabled consumers to spend above their means and inflate retail results. Now that the housing bubble has popped, the consumer credit one is deflating and consumers are struggling with real energy, grocery and healthcare inflation, they’re being forced to curtail their spending. However this shouldn’t necessarily be viewed as a bad thing because consumers need to pull back on their spending over the short-term as part of getting their finances in order, which will give us a stronger economy over the long-term.

Rooting for the American consumer to continue to spend/dig themselves into a deeper hole, is analogous to telling someone with maxed out credit cards that the solution to their problem is to get more credit cards, not pay the current ones down. It’s time for investors, analysts, et al, to get realistic about the American consumer and start thinking about the long-term, not whether or not retailer ABC makes their numbers next month. Long-term economic sustainability in lieu of short-term gains needs to be the buzzword for 2008, because driving towards unsustainable financial patterns is what caused the economic rows of 2007.

Sources:

• The Wall St. Journal: “Retailers Post Weak December Sales” – Kevin Kingsbury, January 10, 2008
• The Wall St. Journal: “Sluggish Holidays” – January 10, 2008
• The Wall St. Journal: “Chilly November” – December 6, 2007
• Reuters: “Nordstrom Dec. same-store sales fall 4 pct” – Karen Jacobs, January 10, 2008
• Forbes (Via Thompson Financial): “Wal-Mart Dec. same-store sales up 2.4%, excl. fuel; backs 4Q eps range” – January 10, 2008
• Forbes (Via AP): “Costco December Sales Rise Sharply” – January 10, 2008
• The Associated Press: “Target December Same-Store Sales Fall” – January 10, 2008
• Bloomberg: “Circuit City Sales Fall 8.9%; Loss Forecast Repeated” – Duane D. Stanford and Mark Clothier, January 8, 2008