Black Friday is upon us again – the day after Thanksgiving. This year, Nov. 26 marks the official start to the holiday shopping season and a time when consumers hunt for the best deals.
Macroeconomic headwinds loom, including inflation and supply chain issues. Inflation has caused consumer confidence to drop significantly in November as consumers worry about higher prices. For example, after 35 years in business, Dollar Tree raised prices on many of its products to more than one dollar — $1.25 on average.
Consumers are more inclined to spend when they see a good deal and promotional discounts, especially during Black Friday. So, how will inflation affect prices and discounts? For that we collaborated with StyleSage Co., which analyzes retailers, brands, online trends and products across the globe.
The data shows that the Black Friday average promotional discount is lower than in previous years. It is also lower than it was two months ago and its YTD average, as per the StyleSage data.
For the week ending Nov. 21, the average promotional discount was 33.4%, compared with two months prior at 37.0%. This level of promotional discounting is also lower than the YTD average of 38.2% and is traditionally higher amongst U.S. retailers, entering the holiday season.
Here are some highlights as we head into this year’s Black Friday season:
- The overall average promotional discount is its lowest compared to previous years going into Black Friday 2021. This year, there are less site-wide promotions also.
- The current average promotional discount is 33.4% and is lower than the YTD average and below the 37% mark seen since September.
- Going into Black Friday week, the specialty sector has the highest average promotional discount.
- Over 60% of the merchandise at mid-tier department stores will also be on sale this year, which could further hurt profits.
- Retailers are concerned about inflation and the supply chain crisis. Currently, they are reporting Q3 earnings and 111 retailers have already mentioned inflation worries, and 142 have mentioned supply issues.
- As they report Q3 earnings, they are also reporting a spike in cost of goods sold (COGS) and a drop in gross profit margins from a year ago. The latter is expected to drop further for Q4.
- Despite the increase in price, retailers are seeing higher sold-out rates, particularly in the Specialty group, suggesting that inflation is not holding back consumer spending.
- Compared with the same week last year, the average number of emails sent per week was 5.95, equal to last year.
- Refinitiv Same Store Sales Index is looking at a 7.1% growth estimate for the holiday season (vs. 10.4% in Q4 2020).
- Meanwhile, the latest E-commerce retail sales numbers shows that Q3 2021 online spending as a percentage of total retail sales has come down thus suggesting consumers spend more at brick-and-mortar stores.
- The Refinitiv IFR data suggest that the amount of money consumers spend online will pick up this holiday season, as e-commerce sales are on track to rise to 15.4% of total U.S. retail sales this Q4 2021
COGS / Gross profit
Due to inflation, several retailers are already dealing with higher COGS. They are concerned about inflation and the supply chain crisis. Currently, they are reporting Q3 earnings and 111 retailers have already mentioned inflation worries, and 142 have mentioned the supply issues.
Big box retailers recently reported Q3 2021 earnings. Notice how they saw a spike in COGS from a year ago, most likely due to inflation and the supply crisis (Exhibit 1). Home Depot and Lowe’s are the only two on track to see a decline in COGS, as general inflation is mostly offset by lumber price deflation.
For the holiday season, most retailers’ COGS is expected to rise even further than the previous quarter. Notice how Macy’s COGS is expected to see a jump of 69.2% from Q3 to Q4 2021. Likewise, Kohl’s, Target, and TJX are also on track to see double digit growth from Q3 to Q4 2021.
The rise in COGS is also expected to cause declines in gross profit margin this holiday season. The Q4 2021 gross profit margin estimates show a decline from Q3 2021, for the most part. Higher cost of goods sold and lower margins might not entice retailers to offer the traditionally high discounts they have offered in the past.
Exhibit 1: COGS and Gross Profit for Q3 2019 – Q4 2021 Estimates
Source: Refinitiv I/B/E/S
Inflation prices
Ugg shoes always make a comeback every holiday season as the weather cool down. Because of their strong demand, they rarely go on sale. As the inflation looms, the average price for the Ugg’s Classic Mini II Women’s has gone from $139.95 in 2019 to $149.95 in 2021. Despite the increase in price, the retailer saw 50% of its Classic Mini II sell out in July this year (Exhibit 2). After a 70.8% jump in Ugg sales from a year-ago, for the three months ending June 2021. The discounts might have enticed shoppers to open up their wallet despite the higher prices.
Exhibit 2: Uggs Classic Mini II Women’s Avg Price, Avg. Discount and Sold out % rate
Source: StyleSage Co.
Likewise, Crocs has seen a very strong sales year, as consumers gravitate towards comfort during the pandemic. The price of the classic Crocs clog did go up from $39.65 to $49.95 (Exhibit 3). At the same time, it’s also lowered its average promotional discount, while maintaining its average sold out rate. The shoemaker continues to also post healthy revenue growth, suggesting inflation might not be affecting demand for its product.
Exhibit 3: Crocs Classic Clog Avg Price, Avg. Discount and Sold out % rate
Source: StyleSage Co.
Sold-out rates
Despite higher inflationary prices and less discounting, merchandise is flying off the shelves. Due to all the supply chain issues, retailers’ inventory has been constrained this year. This, combined with strong pent-up demand from consumers, gives retailers a unique but powerful opportunity to pull back on aggressive discounting.
Notice that the number of products sold out in November 2021 so far, compared to the holiday shopping season from previous years, increased considerably to 15% from an average of 4% in the previous two years (Exhibit 4).
Please note, “sold out” includes items that went completely out of stock at any point during that period, even if they were then restocked – it is still counted as sold out.
Of all the categories, the Specialty group saw the biggest percentage sold-out rates at 19%. This is also the sector with the highest average discount penetration and average discount.
Exhibit 4: Sold Out Rates By Sector 2019 – 2021
Source: StyleSage Co.
Among the top sold-out categories are jumpsuits & rompers (24%), dresses (24%), and backpacks (22%) (Exhibit 5).
Exhibit 5: Top Sold Out Categories November 2021
Source: StyleSage Co.
U.S. mall stores
U.S. mall stores have been struggling for some time, even ahead of the pandemic, including department stores. Less than half (41%) of the online merchandise for U.S. mall stores is on sale this week. This discount penetration (how much of the assortment is on sale) is below where it was during Black Friday last year (59%). Moreover, it is the lowest Black Friday discount penetration ever, since StyleSage started tracking this data in 2016.
The current U.S. mall average percent discount (15%) is also down from one year ago (21%), and it’s also the lowest Black Friday discount level since 2016.
Exhibit 6: U.S. Mall Stores Discount Penetration and Average Discount 2016 – 2021
Source: StyleSage Co.
Premium sector
The amount of discounting among luxury retailers spiked during the 2020 pandemic — the highest levels seen since 2016. This year, however, it’s the opposite story as both the average discount and the discount penetration dropped to their lowest Black Friday levels. Currently, both metrics continue to decline going into the holiday season. The discount penetration level is presently lower (18%) this year than last year’s (38%). The average discount is 8% below last year’s 17%.
Exhibit 7: Premium Sector Discount Penetration and Average Discount: 2016-2021
Source: StyleSage Co.
Specialty sector
The specialty sector is the only sector that has maintained its discounting levels compared to previous years. Last year, the discount penetration rose to 68% on Black Friday week, with an average discount of 30%. Since then, both averages have decreased. In this week of Black Friday, 55% of the merchandise in this sector is on sale, with an average discount of 20%; this is still in-line with previous Black Fridays.
Exhibit 8: Specialty Sector Discount Penetration and Average Discount 2016 – 2021
Source: StyleSage Co.
At the category level, average discounts have gone up the most across sandals, followed by swimwear and suits (Exhibit 9).
Exhibit 9: YOY% Change in Average Discount within the Specialty Category
Source: StyleSage Co.
Beauty sector
This sector usually discounts fewer items, at lower average discounts than the apparel and accessories industry typically does. Last year, the discount penetration rose to 12% on Black Friday week. In this week of Black Friday, only 5% of the merchandise in this sector is on sale, with an average discount of 1%; this is still in-line with the long-term average discount.
Exhibit 10: Beauty Sector Discount Penetration and Average Discount 2016 – 2021
Source: StyleSage Co.
Mid-tier department store sector
Department stores have been struggling even before the pandemic. In previous years, this has been the most promotional-driven sector throughout the year.
This year, however, this sector has experienced a slight decrease in discount penetration — 74% in 2020 to 62% this year. This means that still over half of inventories are on sale. That’s extremely high and the question is how long this sector can maintain these high discount levels, which come at the expense of margins.
The average discount is also lower from pre-pandemic years – from 28% in 2019 to 23% in 2021.
Exhibit 11: Mid Sector Discount Penetration and Average Discount: 2016 – 2021
Source: StyleSage Co.
Refinitiv holiday sales forecast
The holiday season is in motion, and analysts polled by Refinitiv are becoming increasingly more bullish on the season. They have been raising their same store sales (SSS) estimates for Q4 2021. Holiday sales are expected to see robust growth. The Refinitiv Same Store Sales Index is looking at a 7.1% growth estimate for Q4 2021, below the 10.4% SSS growth last year. Despite difficult comparisons from a year ago, the discounters, home furnishing and home improvement are expected to post the strongest SSS growth at 7.3%, 5.4% and 3.3%, respectively.
Exhibit 12: Same Store Sales Sector Estimates – Q4 2020 vs. Q4 2019
Source: Refinitiv I/B/E/S
Several retailers performed well during the 2020 pandemic and posted strong SSS. Despite facing these difficult SSS comparisons, they are expected to continue posting strong SSS estimates for Q4 2021.
Crocs is facing the most difficult comparison from a year ago. The shoemaker posted an impressive 63.8% SSS gain in Q4 2020, and is on track to report a robust 31.1% SSS increase in Q4 2021. Consumers continue to give the gift of comfort this holiday season.
Consumers also continue to invest in improving the stay-at-home experience. Four out of the ten most difficult comparisons are in the Home category (Exhibit 13). Within this group, Lovesac is facing the most difficult comparison — and still is expected to post double digit Q4 SSS gains with a 19.1% Q4 SSS estimate. Similarly, Williams Sonoma has a 9.2% SSS on top of last year’s robust 25.7% SSS gain.
Meanwhile, Home Depot and Lowe’s are facing very difficult comparisons from a year ago and are on track to post single digit SSS. Due to their very difficult SSS comparisons, such small gains are actually a sign that business is holding up well.
The discounters are also looking to have a merry holiday season despite facing difficult comparisons.
Exhibit 13: Retailers facing difficult SSS comparisons: Q3 2020 Actual vs. Q3 2021 Estimate
Source: Refinitiv I/B/E/S
Due to store closures last year, many retailers are facing easy comparisons from a year ago. As a result, most retailers are expected to report double-digit comps, which are not a true indication of organic business growth.
Express Inc. is facing the easiest year-over-year SSS comparison. Likewise, mall stores, including apparel and department stores, had been struggling for some time even before the pandemic. Due to easy comparisons from a year ago, comps appear stronger and the bulk of them have double-digit Q4 2021 SSS estimates (Exhibit 14).
Exhibit 14: Retailers facing easy SSS comparisons: Q3 2020 Actual vs. Q3 2021 Estimate
Source: Refinitiv I/B/E/S
E-commerce
The Census Bureau reported that e-commerce sales hit $214.6 billion in the third quarter of 2021, accounting for 13% of total U.S. retail sales (Exhibit 15). This is a deceleration from the stellar 15.7% growth seen in the midst of the pandemic in Q2 2020. This suggests that the bulk of retail sales online declined and the bulk of spending picked up in physical stores.
Still, the Refinitiv IFR data suggest that the amount of money consumers spend online will make a comeback and pick up this holiday season. E-commerce sales are on track to rise to 15.4% of total U.S. retail sales this Q4 2021 (Exhibit 15).
Exhibit 15: E-commerce Sales as a Percentage of Total U.S. Retail Sales
Source: Refinitiv IFR
