The 2014 holiday shopping season is in the books, and reviews are mixed. The Commerce Department reported that December retail sales fell 0.9% percent (the biggest decline since last January), after increasing 0.4 percent in November. What’s going on in the average consumer’s world?
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Lower gasoline prices had an effect. When removing the drop in prices at the pump, retail sales slumped 0.4%, compared to a spike of 0.6% in November. This is in line with our estimates, which suggest that consumers did a huge portion of their holiday shopping around Black Friday rather than the month of December.
Looking at retail chains, Target said it is closing its Canadian operations. However, other retailers raised their earnings guidance and posted stronger than expected same store sales.
Exhibit 1: Same Store Sales Index (Ex-Drug)
Source: I/B/E/S estimates
Look to the malls
Earlier this week, Express, Tilly’s and Lululemon raised their earnings guidance, while Bebe Stores smashed its same store sales expectations. All these stores have a strong mall presence, and the fact that they are seeing strong results indicates that momentum is in line with our research which suggests that not only is mall traffic improving, but so are sales and (most importantly) margins.
Although it’s still early in the season, Q4 SSS results have been robust so far (Exhibit 2). Accordingly, analysts have also raised their projections. Our Quarterly Same Store Sales Index, which consists of 76 retailers, is expected to post 1.9% growth for Q4 (vs. 0.7% in Q4 2013). The index has risen from 1.6% in November to 1.9% currently.
Exhibit 2: Same Store Sales Results – Q4 2014
Source: I/B/E/S estimates
Consumer confidence rising
Despite all the mixed retail results, consumers are telling us that they feel good about the economy. The latest reading on The Thomson Reuters Ipsos Consumer Outlook Index (TRIp) remains stable over last month’s strong showing.
What’s more, the current and job indices show an increase over the previous month — another sign of a positive trend. This also tells us that consumers see fewer job losses and feel more confident about the current economy. People are also reporting recovery in their local economy’s job creation picture and improved spending power within their circles. All this might lead to further optimism about the future of the economy.
Exhibit 3: The Thomson Reuters Ipsos Consumer Outlook Index
Source: DataStream
Store closures
In the past, it was important for retailers to continuously open stores to show growth. Today we are seeing the opposite. Macy’s and JC Penney have announced store closings in 2015, which makes sense for both these retailers. They have mastered the art of omnichannel selling — consumers can shop in the store and if they can’t find their size, can have the item shipped to their home. Or they can fulfill an order online and pick up the item in the store.
Closing failing stores could allow further investment in areas of growth. Now that consumers are using smartphones, it’s essential to have an online, social presence in every form. This gives the impressions that no matter which outlet the customer chooses, there is a seamless buying process.
Meanwhile, Target closed its operations in Canada, causing investors to question Target’s growth prospects. However, for Target it might also be a smart move to get rid of an operation that is only generating a loss, and refocus those funds to areas of positive growth. For starters, the retailer has regained some of its caché in the U.S.
Target has tightened its IT security, improved its product offering, and is expected to post a 2.4% gain in SSS for Q4 2014, which would be its strongest showing in nine quarters. What’s more, StarMine models suggest that both analyst and investor sentiment are behind the stock.
Exhibit 4: Target – StarMine Model Scores
Source: Eikon
Investment in growth
Meanwhile, Best Buy said domestic revenue spiked 4.1% during the holidays, while online sales rose 13.4% on a comp basis. These strong numbers were driven by demand for large screen televisions and the latest smartphones. Yet the retailer said itdoesn’t believe the strong momentum is sustainable in the next quarters, and lowered its outlook for the first half of the year. However, to stay on top of its game, Best Buy plans to invest in various growth areas that will also affect the bottom line. Despite its weak forecast, the retailer has come a long way in terms of strategy, customer service training, price matching and offering a multi-channel experience.
Exhibit 5: United States E-Commerce
Source: Eikon
Continuous investment needed
Still, investment in growth is necessary to continue competing with the likes of Amazon and other online retailers. So although Best Buy’s announcement affected its share price, it’s essential for retailers to continue investing in technology and innovation to stay on top of the competition. The world of e-commerce and evolving consumer buying channels won’t stand still.
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