Despite Hurricane Sandy, the looming fiscal cliff and still-high unemployment levels, shoppers seem willing to spend this holiday season and high levels of consumer confidence are contributing to analysts’ upbeat views. To make sure they win the battle for sales and market share, however, retailers are becoming increasingly aggressive, planning to open their doors on Thanksgiving Day itself and offering even more eye-popping deals for consumers willing to forego their turkey dinners.
The holiday spirit is starting to take hold in the retail sector, with analysts taking a particularly upbeat view of the outlook for apparel, footwear and home furnishings retailers, with jewelry stores following not far behind. Over the course of the last few weeks, analysts have become more bullish about the prospects for a robust holiday shopping season in general, raising their forecasts for growth in the quarterly Thomson Reuters Same Store Sales Index) during the fourth quarter of 2012 to 1.9% FROM 1.5% previously.
The fun traditionally begins on Black Friday – the day after Thanksgiving. This is the day that many retailers rely on to keep them in the black for the year, and to set the tone for the weeks that will follow. For some retailers, like Kohl’s (KSS.N), which has struggled to remain profitable and that last year reported a drop of 6.2% in same-store sales for November, this year’s holiday season kickoff may make a big difference: analysts currently predict that Kohl’s same-store sales will grow 2% this month.
This year, however, a growing number of retailers will open their doors even earlier than usual. Instead of making shoppers wait until dawn on Black Friday, they’ll open on Thanksgiving Day itself, and offer some dramatic discounts to lure customers inside their doors. Retailers are offering holiday deals earlier than last year. Wal-Mart Stores (WMT.N) will be offering special one-hour discounts on Thanksgiving Day, guaranteeing that it will have enough of these popular items, like the Apple (AAPL.O)iPad, in stock to meet demand. To insure it can keep this pledge, the retailer has ordered double the quantities it did last year. As a result of this kind of dramatic attempt to woo shoppers, analysts have become bullish on Wal-Mart’s earnings outlook, boosting their earnings forecast both for the company’s fiscal third and fourth quarters of 2012.
The trick is for retailers like Wal-Mart to balance the costs of these efforts to boost sales and market share – the earlier opening, the deeper discounts, the push to match Internet-advertised prices, the need to spend more to recruit temporary help – with the costs of those initiatives. Most will, as usual, limit quantities of the most heavily discounted items: this is an art that Macy’s (M.N), for one, has long since mastered while others, such as J.C. Penney (JCP.N) still struggle to control. Still, the biggest retailers – Toys R Us, Target (TGT.N) and Wal-Mart among them – are reported to have embarked on a hiring spree to prepare for what they expect to be a surge in shopping activity.
The tug of war between bricks and mortar retailing and Internet retailers – the so-called ‘bricks and clicks’ struggle – is likely to gain in intensity this holiday season. Some retailers, like Wal-Mart, are aggressively battling to combine the two modes of shopping, offering customers the ability to make their purchases online and then pick them up at a nearby store. That’s a strategy that electronics retailer Best Buy (BBY.N) also has attempted, but it hasn’t been enough to fend off the trend that has transformed this once-popular holiday shopping destination from market leader to market laggard. Smart phone technology has made Best Buy the most prominent victim of the phenomenon known as ‘showrooming’, in which customers check out the merchandise in person at a Best Buy store, then head online to see if they can find a better deal (sometimes even saving sales tax in the process).
Best Buy and other retailers hit by this showrooming trend are fighting back this holiday season by promising to match any advertised online price and offering similar incentives, such as free shipping or same-day pickups or deliveries. That is likely to take a toll on Best Buy’s margins, as well as fueling frustration among shoppers stuck in long lines as each customer in front of them clicks through an array of advertised prices on their smartphone for each item in their cart. Little wonder that the retailers have ramped up hiring levels. Amazon (AMZN.O) has been a prime mover in these showrooming wars, and in part as retaliation, Wal-Mart has said it will no longer stock Amazon’s Kindle e-readers and tablets in its stores; Target has already removed them from its shelves.
Shoppers appear to be increasingly fond of doing their shopping from catalogs – perhaps out dread of the long lines at the cash registers at Wal-Mart or Target. Certainly, analysts expect catalog retailers to show the highest growth rate in earnings in the fourth quarter of 2012, predicting the group will see its fourth-quarter profits jump 47.4%. Analysts predict that apparel retailers will see earnings growth of 25.5%, with 31 of the 39 companies in the group expected to report higher profits. The group includes two standouts: Ann, Inc. (ANN.N), which owns and operates chains including Ann Taylor and Loft and that analysts expect to see a 152% jump in earnings, and Gap Stores (GPS.N), which already has reported big gains in same-store sales throughout much of 2012 and that analysts now predict will post a 51% increase in earnings over 2011 levels. Both have benefitted from offering on-trend merchandise and analysts expect Ann, Inc. to see a 7.8% jump in SSS for the fourth quarter of 2012.
Ann, Inc. is among the retailers analysts believe are most likely to report positive earnings surprises when they report their fourth-quarter results, according to the StarMineSmartEstimate model. Other retailers whose SmartEstimates (earnings forecasts that place a greater weight on the most recent analyst forecasts and those by analysts with the most accurate track records in forecasting) significantly exceed the I/B/E/S consensus predictions include Ethan Allen Interiors Inc. (ETH.N) and Shoe Carnival Inc. (SCVL.O) Ethan Allen Interiors Inc. suffered during the recession, but a strong marketing campaign helped put the company’s brand back on track and for the last year it has been posting healthy financial results. Now, Ethan Allen plans to expand its Internet presence internationally, migrating to the ‘cloud’ from internal servers, and rolling out a Canadian website by the end of November and one for European customers toward the end of the year.
But when it comes to companies that rely on the Internet for all their sales, the picture is a gloomier one. All that discounting on the part of this group of companies may take a toll on their bottom lines, analysts caution. The Internet retailing sector has the lowest projected earnings growth rate of any in the Thomson Reuters universe, with analysts forecasting earnings growth of only 8.6%. Nine of the 15 companies that make up this sector are likely to see their fourth-quarter earnings decline over year-earlier levels, with Netflix (NFLX.N) likely to see the biggest plunge.
Analysts also remain wary when it comes to the prospects for some kind of recovery on the part of JC Penney, which has been struggling to get its new retail strategy off the ground for much of 2012. Analysts forecast that Penney will show the weakest fourth-quarter same store sales figures within our universe, with SSS falling 15.9% in the fourth quarter of 2012 from year-earlier levels. Analysts also expect negative earnings surprises from Build-A-Bear Workshop (BBW.N) and Office Depot (ODP.N)
Despite the fact that the unemployment rate remains at relatively high levels, the improving labor market and the housing market’s recovery has boosted consumer confidence to the point that retail sales have maintained a relatively robust pace of growth of 3% to 5% throughout 2012. Consumers, it seems, remain willing to open up their wallets and spend, and the election pledges by both presidential candidates and members of Congress from both parties to resolve the looming question of the fiscal cliff have given them the confidence to keep spending. Even Hurricane Sandy’s destructive path doesn’t seem to have done much to dent the holiday shopping outlook.
For more insight into our outlook for the holiday season’s impact on retailers, please see this full report.
