October 29, 2020

It’s a Mixed Trick or Treat Bag at Halloween for U.S. Retailers

by Jharonne Martis.

The coronavirus pandemic continues to restrain normal activities, including traditional Halloween events, such as trick or treating and costume parties. As a result, retailers are feeling the pinch of a very scary Halloween season.

In collaboration with StyleSage, Refinitiv discovered that the average discount penetration, which means the percentage of Halloween-related merchandise on sale, has gone up compared to last year (Exhibit 1).

However , the average discount is lower this year going into the holiday weekend, as retailers try not to hurt their margins too much (Exhibit 2). Coincidentally, costumes and home decorations are the top two items Americans intend to purchase for Halloween this year (Source: NRF Halloween Spending Plans Survey 2020).

Exhibit 1: Average Discount Penetration for Halloween Costumes & Accessories, and Home Decorations

Source: StyleSage Co.

Exhibit 2: Average Discount for Halloween Costumes & Accessories, and Home Decorations

Source: StyleSage Co.

The National Retail Federation says that total Halloween spending is expected to be $8.0 billion. That figure is down from the $8.8 billion total spend in 2019 (Source: National Retail Federation, Halloween Headquarters). The first priority for consumers is costumes, then home decorations, followed by candy and greeting cards.

Let’s take a look at three companies that directly bank on the scary holiday:

Michaels Companies Inc. (MIK.O)

Customers love going to Michaels for Halloween arts & crafts and home décor. Anecdotally, pre-COVID-19, the checkout lines at Michaels continued to get longer every year – almost an hour long at one New York City store in the week leading to Halloween. The retailer continues to offer everyday promotions, and its Rewards loyalty program has helped drive store traffic. Recently, it revealed its new transformation plan, aimed at improving its omnichannel offering and store operations.

Analysts polled by Refinitiv seem to be bullish on the retailer’s Q3 performance, which includes Halloween sales. The StarMine Analysts Revisions Model (ARM) is highly predictive of both the direction of future revisions and price movement. Michaels scores a 96 out of a possible 100 suggesting that analysts are likely to revise earnings estimates upward.

Michaels has also benefitted from the nesting theme as consumers stay home and work on crafting projects. For the third quarter ending October 31, Michaels is expected to see a 50.53% growth in earnings, and a 13.9% growth in revenue. Its StarMine Earnings Quality Score of 98 suggests earnings are coming from sustainable sources. Finally, its Valuation Momentum score of 100 is being driven by its Relative Valuation Score of 92.

Exhibit 3: Michaels Companies StarMine Model Scores

Source: StarMine

Party City (PRTY.K)

Analysts polled by Refinitiv agree, COVID-19’s restrictions on gatherings are making Party City’s Halloween sales look spookier this year. In its latest earnings release, Party City warned that it expects Halloween season will be down year-over-year.

StarMine models caution that the company has credit issues and that value momentum is not in its favor. Its Credit Risk – SmartRatios Model score is a weak 1 out of a possible 100. This model looks at accounting ratio analysis, utilizing both financial statement data and forward looking analyst estimate data via the StarMine SmartEstimate. The score of 1 is significantly weaker than last Halloween’s score.

Exhibit 4: Party City StarMine Model Scores

Source: StarMine

Hershey Co. (HSY.N)

In a normal year, Hershey’s products fill trick or treat bags, but consumers are being wary this year about trick or treating.

Nevertheless, analysts polled by Refinitiv see upside on the company’s investment in its e-commerce presence and pricing. This legendary candy company’s fourth quarter earnings are expected to show a 7.8% growth.

The StarMine Earnings Quality Score for Hershey is 84 indicating cash flow and operating efficiency levels look healthy (Exhibit 3). What’s more, the Credit Text Mining and Structural Models are in the top quartile.

The Credit Text Mining Model applies sophisticated text mining algorithms to Eikon’s company events conference-call transcripts, financial statements and other regulatory filings, Reuters News, and select broker research reports to identify language that is predictive of credit risk.

Hershey scores a strong 93 on this model. However, its Credit Risk Smart Ratio is not as strong and suggests its leverage ratios could use some improving. The Credit Structural Model score of 84 suggests that the company is unlikely to default on its debt obligation over the next one-year period.

Exhibit 5: Hershey’s StarMine Model Scores

Source: StarMine

In general, there is more Halloween merchandise on sale this year than last. And, although Halloween sales are expected to be lower compared to previous years, strength in other business segments will help offset weakness at Michaels Stores and Hershey’s. What’s more, the strong demand for home related merchandise is helping Michaels Stores post a robust 50.3% earnings growth for the quarter. On the other hand, Party City might not fare as well.

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