Retailers are bracing for a holiday shopping season that might contain more fear than cheer. Due to a late Thanksgiving, the season is six days shorter than last year. The October government shutdown is having lingering effects and a Reuters/Ipsos poll shows that consumers are in a wary mood. We might have to paint Congress green and call it the Grinch.
Fewer shopping days mean that retailers are offering holiday deals earlier than last year, prepping their e-commerce and social media presence, offering layaway earlier and fighting online competitors with price-matching strategies. However, a recent poll conducted by Reuters/Ipsos shows that as of Nov. 10-14, 48% of respondents hadn’t begun their holiday shopping.
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Poll: shoppers cautious due to shutdown
Worse, 54% of respondents suggest they are more cautious about their spending this holiday season due to the 16-day government shutdown and economic uncertainty. Houses are going up in value, which should give consumers more confidence, but sentiment has been hit by the government’s lack of leadership and worries about job security. This is reflected in the latest decline of the Thomson Reuters/University of Michigan Consumer Sentiment Index.
Exhibit 1: The Thomson Reuters/University of Michigan Consumer Sentiment Index
Source: DataStream
Crucial selling season
It’s a make-or-break holiday season for retailers, since they haven’t had a spectacular year. Back-to-school sales were less than stellar as consumer sentiment stayed low. Retailers even urged Congress to offer a long-term solution to its gridlock.
Last year, a few retailers opened up their doors on Thanksgiving evening and millions of shoppers showed up to shop and burn off the turkey meal. In an increased effort to take a slice of the pie, more retailers are opening their doors on Thanksgiving evening this year – as early as 8 p.m. They are definitely paying attention to surveys that show shoppers prefer to hit the malls after the meal than waking up at dawn on Black Friday.
The bulk of the holiday survey respondents (34%) indicated they would shop about equally online and at stores. But here are some warning signs: shoppers hope to spend about the same amount as last year on groceries and other discretionary items, and they are hoping to lower their overall spending range to $100 to $499 from $249 to $999.
Exhibit 2: Total Average Holiday Spending 2012 Actual vs. 2013 Estimate
Source: Reuters Ipsos Holiday Survey
Sales outlook: not robust
The Same Store Sales Index is looking at a 1.8% growth estimate for Q4 2013. While the 1.8% SSS estimate is stronger than last year’s 1.6% SSS result, it’s still below the 3% healthy mark, suggesting spending will be modest.
Most survey respondents (35%) indicated they will shop at a mix of stores with discounters taking a big piece of the pie (31%). Notice how the Discount group, excluding Walmart, has a 2.6% SSS estimate for the holiday season. This is still below the 3.9% result posted in Q4 2012.
However, the dollar stores are on top within the sector. Dollar General has a robust 5.9% SSS estimate, above its 3.0% Q4 2012 result. Likewise, Dollar Tree Stores, Inc. is looking at a 3.5% SSS estimate vs. 2.4% Q4 2012. Shoppers will be hitting these stores for holiday supplies (wrapping paper, tape, small toy gifts). The bulk of survey respondents (54%) also intend to shop closer to home this year to save on gas, making the discounters the perfect one-stop shop during the holiday season; shoppers can fill up on gasoline, while shopping for groceries and gifts at Sam’s Club and Costco.
Exhibit 3: The Same Store Sales – Q4 2013 Sector Estimates
Source: I/B/E/S Estimates
Where’s the glitter?
Digging deeper into the data, three Specialty sectors are expected to shine this holiday season (See Exhibit 4 below). The improvement in the housing market has caused shoppers to shift their buying habits and purchase more big ticket items for the house. This trend is expected to continue this holiday season. Three sectors to watch include Jewelry, Home Improvement, and Home Furnishing at 4.4%, 4.0%, and 3.6% SSS, respectively.
Exhibit 4: The Same Store Sales – Q4 2013 Specialty Sector Estimates
Source: I/B/E/S Estimates
Department store popularity waning
On the flip side, the department store sector is only expected to have a 0.2% SSS Q4 2013 gain, below the 1.7% SSS result it posted a year ago. The poll shows that 76% of respondents who intend to shop at department stores say they will go there for clothing. Meanwhile, the overall apparel group is expected to see a 1.3% gain vs. 3.0% Q4 2012. The Teen sector is expected to see the weakest SSS in the group at -4.6% vs. -0.5% in Q4 2012. This sector is very competitive and promotional, and continues to lose market share to Forever 21, Inc. and H & M Hennes & Mauritz AB.
In terms of individual retailers, Free People already smashed expectations with an impressive 30% comp in Q3 2013. Currently, the retailer still has the highest SSS estimate for the holiday season at 15.4% vs. 37.0% Q4 2012. Free People has a loyal customer base, and has scored with unique on-trend merchandise. What’s more, analysts rave about Free People’s inventory levels and its ability to sell merchandise at full price. Alternatively, Abercrombie & Fitch still offers the same merchandise it did a year ago, and has the weakest Q4 2013 SSS estimate at -11.2%.
Learn more. Attend our Holiday Retail Outlook Webcast >
Flat restaurant sales seen
According to the poll, 71% of respondents don’t intend to eat out more than usual during this holiday season. As a result, most dining sectors are expected to be weaker than last year. Still, during the busy shopping season, shoppers won’t forgo their $4 cup of joe. Starbucks and Krispy Kreme are still expected to be on top with 6.2%, and 4.2% SSS, respectively. When it comes to rushing for a bite, Chipotle Mexican Grill is benefiting with a 6.7% SSS Q4 2013 growth vs. 3.8% last year. During football season, Buffalo Wild Wings Inc. sales boast a 4.1% SSS Q4 2013 estimate vs. 5.8% Q4 2012. On the flip side, Ruby Tuesdays has the weakest Q4 2013 SSS estimate at -8.7% vs. 0.3% SSS Q4 2012.
Exhibit 4: The Restaurant Same Store Sales – Q4 2013 Sector Estimates
Source: I/B/E/S Estimates
Instant Gratification
The bulk of survey respondents (34%) intend to shop equally online and in stores. Consumers have definitely become savvier in search of the best deals, and thanks to advancements in technology and smartphones, they are fond of instant gratification. The Reuters/Ipsos survey respondents didn’t show much interest in using their smartphones while shopping, however those that do can benefit from an increasing number of apps to do comparison shopping, research a product or find a better discount. Moreover, retailers will be offering instant discounts on their apps.
Retailers know that shoppers will subscribe to their newsletters to receive special coupons and alerts. Moreover, many stores also leak Black Friday deals on their Facebook pages and Twitter profiles. Due to the shorter holiday season, Amazon and Walmart are already advertising pre-holiday discounts, and have ramped up their distribution to meet demand. Accordingly, 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: The Same Store Sales – Q4 2013 Specialty Sector Estimates
Source: Datastream
Show Me the Money
When looking at the earnings growth rates for the holiday season for the 129 retailers, Internet retailers are on top.
Exhibit 8: The Retail Earnings Growth Rate – Q4 2013
Source: I/B/E/S Estimates.
Amazon is now competing directly with Apple, offering its own version of iTunes — a standalone music app called Cloud Player for Mac that combines iTunes and the Amazon music library. Music can be accessed at any time, even when offline. Moreover, there’s talk that Amazon intends to compete with Apple TV’s set-top box in spring 2014.
Amazon is famous for reporting losses as its business grows and grows. Looking toward Q4 2013, analysts’ consensus earnings estimate is $0.66 per share. According to a five-star analyst with a very accurate rating, its EPS could be as high as $0.69. A $0.66 EPS would be a 216.2% growth rate in earnings. For Q1 2014, analysts included in the StarMine SmartEstimate say Amazon expects to see a 200.1% jump in earnings.
Similarly, Netflix is a favorite for the holiday season with a 402.8% growth rate. The company reported a $0.13 EPS in Q4 2012, and analysts are projecting it to grow to $0.65 in Q4 2013. The companies streaming service has been growing. Smart TVs are predicted to be popular this season. More smart TVs come with the Netflix application already loaded, enticing shoppers to activate the subscription. Moreover, Netflix has also been offering subscription promotions with the purchase of a smart TV.
Holiday Competition
Once a victim of showrooming, Best Buy just announced that their investment and improvement in their e-commerce initiatives has helped them grow their online traffic this past quarter to 15.1% SSS. What’s more, the retailer is using showrooming to its advantage. When shoppers enters the store, not only are they playing with the item, but Best Buy is providing excellent customer service. And the gravy on the turkey? The shopper can leave with the item, as the retailer offers price-matching in order to compete with online retailers. What’s more, the item can be shipped for free.
What could help awaken investors to Best Buy and provide a boost to the company’s valuation and share price? Higher earnings, for starters; something that analysts believe is already in the offing. Additionally, StarMine’s Price Momentum (Price Mo) model shows Best Buy doing better than 100% of its peers. All that is encouraging for those hoping Best Buy’s leadership will be rewarded with higher valuations. Analysts are confident in the business initiatives going into the holiday season. StarMine models also suggest that Wall Street investors and analysts’ sentiment are behind the retailer.
The Tablet Wars
Electronics are always a favorite during the holiday season. According to the poll, 25% of respondents prefer the Apple iPad when it comes to purchasing a tablet, followed by the Samsung Galaxy (17%). As a result, StarMine analysts are predicting a 6% jump in revenue for Apple, and an impressive 10% jump in iPad sales.
Exhibit 6: Apple iPad Revenue (USD Billions) Actuals vs. Estimate
Source: StarMine Professional
Exhibit 7: Apple iPad Units (Millions) Actuals vs. Estimate
Source: StarMine Professional
What about the affluent shopper?
Looking at the luxury goods sector in the current reporting cycle, which includes the holiday month, we find that six out of the eight stores score in the top percentile when it comes to the StarMine Combined Credit Risk (CCR) model score, the most comprehensive StarMine credit model. Accordingly, these luxury retailers are assigned an implied credit rating of A+ and better on their company debt, suggesting that for the most part, these luxury stores are financially stable.
Finally, only Coach — which is undergoing a major facelift — is expected to see a decline in both earnings and revenue. It is shaking up its management while revamping its stores and rolling out fresh new merchandise with a new logo. In order to make room for the new styles in November, the retailer has been offering steep promotions to move inventory, but this has been eating up margins.
In response to this major transition, every analyst covering the stock lowered earnings projections, resulting in a mean consensus forecast of $1.12 a share for the quarter ending December 2013. And those downward revisions may not be over: the StarMine Analyst Revision Model (ARM) indicate that analysts are likely to continue to knock their earnings forecasts as the quarter progresses.
Coach has a StarMine ARM score of 4, which places it at the bottom decile of all U.S. companies in this model. The lower a company’s ARM, the more top-ranked analysts have been lowering their earnings forecasts and the greater the likelihood that they will continue to do so. Still, some analysts think this might be an opportunity for contrarians and long term investors to consider the retailer’s growth plans.
On the flip side, Michael Kors is leading the global luxury market, with on-trend merchandise. Moreover, analysts are optimistic on its long term strategies, including global expansion. The company continues to see revenue growth in North America, Europe and Japan, and most importantly, improved margins.
Similarly, Burberry is expected to see double digit growth on both top- and bottom lines. It already posted an impressive 13% same store sales during the last reporting cycle. The luxury name is seeing strength in its beauty division, which is well poised for the holiday season. Analysts are also confident in its retail expansion.
Exhibit 9: The Luxury Retail Earnings Growth Rates –2013/2014 Estimates
Source: StarMine Professional.
In conclusion, the ongoing Congressional budget negotiations are causing consumers to be careful about spending. However, the improvement in the housing market continues to impact retail sales. When shoppers open their wallets they are gravitating towards the home goods categories to upgrade home appliances and improve the “stay at home” holiday entertainment experience. Accordingly, they will shop at the discounters for value gifts, and groceries to cook at home vs. dining out.
This is putting more pressure on other retailers to offer steep discounts ahead of the Black Friday weekend. Best Buy has made a bold move, acknowledging that it’s in a very promotional environment and that if their competitors will offer steep discounts, so will they – even if it hurts margins. Best Buy’s shares were hammered on this news, so stay tuned as the holiday season moves ahead.
Learn more. Attend our Holiday Retail Outlook Webcast >
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