U.S. retailers are bearing down for the make-or-break holiday shopping season and its traditional kickoff day – Black Friday, the day after the Thanksgiving holiday on the last Thursday in November.
Store chains started announcing their opening hours from the beginning of November. Some open at dawn, while others are starting Black Friday sales on Thanksgiving evening. However, several retailers including GameStop, hhgregg, Costco, Nordstrom and CBL Associates are closing their doors on Thanksgiving to give their employees family time and bring back the actual Black Friday tradition.
Retailers that close on Thanksgiving may appeal to millennials, who make up the largest share of the U.S. population and are known to be socially responsible.
Black Friday is one of the most critical retail sales days during the holiday season. Retailers just reported Q3 earnings, inventory levels and profit margins that suggest this might be a good holiday season. Overall, the Thomson Reuters Retail and Restaurant Index fourth quarter earnings are expected to rise 6.2% for from Q4 2015. For Q4 2016, there were 30 negative EPS preannouncements issued by retailers and nine positive vs. only one this time last year (Exhibit 1).
Exhibit 1. Earnings Guidance Q4 2015 vs. Q4 2016
Source: I/B/E/S data
The weather factor
A warmer than usual fall season is giving way to colder weather, which could spur sales of winter-related merchandise on Black Friday.
Competition: department store vs. off-price
Department stores have been struggling for some time. However, they just reported third quarter earnings results and it’s evident that they’ve learned from their mistakes. They have reduced massive amounts of inventory going into the 2016 holiday season. They’ve also reduced discount levels, easing pressure on profit margins. As a result, the department stores sounded optimistic on their third quarter earnings calls about their position entering this holiday season.
Still, consumers are very much enticed by promotions and discounts, and the value proposition is very important to them. They also still want designer clothing for less. Thus, off-price retailers such as TJX Companies and Ross Stores have been outperforming the department sector for some time now. This holiday season is no exception. TJX and Ross are both expected to post 2.5% SSS growth for the holiday season (Exhibit 2).
Exhibit 2. Q4 2016 Same Store Sales – Department Stores vs. Off-Price Retailers
Source: I/B/E/S data
Value is key
The middle class and low-end consumer will also seek value promotions at JC Penney. Accordingly, the department store still has the strongest holiday estimate in the sector at 3.0% SSS. Sephora is a favorite destination during the holidays and the brand is luring shoppers into JC Penney. What’s more, the retailer incorporated more new appliances just in time for the holidays. Meanwhile, the high-end consumer will be gravitating towards JW Nordstrom which is expected to report a 1.3% SSS.
Other Winners
Cosmetic and fragrances are top gifts during the holiday season, and Ulta Salon has the strongest SSS in our retail universe at 11.4%. Kate Spade is the favorite choice in the handbag category, and is expected to post a 6.9% SSS. Meanwhile, Lululemon continues to benefit from the athleisure trend, and is expected to register a 5.5% SSS.
The athletic space continues to thrive. Big Five Sporting Goods and Dick’s Sporting Goods are both benefitting from the recent bankruptcies of Sport Authority and Golf Smith. They are expected to benefit this holiday season with comps of 6.0%, and 4.9% respectively. Others also profiting include Finish Line, and Foot Locker with comps at 8.4%, and 4.8%, respectively. In the teen space, Zumiez is on top with a 4.4% estimate, and Aerie’s robust 7.8% SSS is helping its parent company American Eagle post a 3.4% SSS.
Exhibit 3. Top SSS estimates – Q4 2016
Source: I/B/E/S data
Weak spots
The retailers with the weakest SSS estimates are suffering from company-specific issues. Teen retailer The Buckle has been struggling with its women’s fashion and as a result has the weakest -9.8% SSS estimate. Abercrombie’s fashion has been out of favor with teens for some years now, and has a -3.4% SSS. Meanwhile, GNC is losing market share to competitors with better pricing models. Sears has been struggling for some time to appeal to shoppers, still has credit issues and has a -4.8% SSS.
Exhibit 4. Bottom SSS estimates – Q4 2016
Source: I/B/E/S data
Online sales
Internet sales have shaped the traditional Thanksgiving/Black Friday shopping period. Consumers are all about instant gratification, and getting the products delivered just-in-time. Retailers that offer these capabilities will outperform this holiday season. As a result, the Internet & Catalog Retail sector has the strongest estimated Q4 2016 earnings growth rate at 18.4%, with Amazon and Netflix on top with 36.2% and 32% estimated growth rates.
E-commerce transactions still make up only a fraction of total retail sales – 8.4% as of the end of the third quarter, compared to 4.2% in early 2010 – but they have changed shopping patterns, and likely will only increase with the passage of time. Comparison shopping for deals is now easier. As a result, the shopper is more conscientious about what he/she is purchasing vs. doing more impulse shopping. Notice how e-commerce dollar sales kept growing as a percentage of total sales, showing that the amount of money consumers spend online continues to grow rapidly for the most part (Exhibit 5).
Exhibit 5. E-Commerce As a Percent of Total Retail Sales: 1999 – Present
Source: Datastream
