Holiday Ring-Up Relies On Wrung-Out Shoppers

10/31/2011


For many U.S. retailers, the holiday season is shaping up as a trudge through snow. Industry researcher ShopperTrak sees retail sales rising 3% during the holidays, on top of 4% growth last year. Shipping giant FedEx ($18; FDX) also projects overall retail sales growth of no more than 3% for the season, though it expects a 12% increase in shipments between Thanksgiving and Christmas because more shoppers are ordering online.

Modest sales growth is certainly better than the 2.8% decline seen in 2008. But retailers have not forgotten 2008, when many got stuck with excess inventory. Since then, stores have tried to lean up their supply chains. In addition, jitters regarding a second downturn may have prompted retailers to place conservative orders. Of course, if retailers underestimate demand, they run the risk of lost sales.

Last year, consumers tended to favor stores that sold necessities rather than discretionary items. That trend could repeat this year. High unemployment and rising gasoline prices are among the factors keeping shoppers conservative. With fewer opportunities to convert browsers into buyers, stores may resort to aggressive promotions, squeezing profit margins already pressured by rising costs.

The holiday season means a lot for both retailers and the overall U.S. economy. November and December generate nearly 20% of the retail sector's annual sales but account for 25% to 40% of sales for many individual retailers. And with personal consumption accounting for more than 70% of U.S. gross domestic product, any holiday slowdown could presage trouble reaching far beyond retailers.

Several signals point to muted expectations:

• Consumer confidence has declined markedly since the summer, with the Conference Board's sentiment index reaching a two-year low in October. And though consumption spending rose in August, incomes fell for the first time since October 2009. Paychecks are crucial to consumer spending, as credit has become more difficult to obtain.

• U.S. ports and railroads haven't seen the usual spike in volume leading up to the holiday season. The last time shippers failed to see a preholiday peak was recession-marred 2008.

• Many retailers expect only a modest bump in holiday hiring from last year, with fewer headcount additions than those in prerecession periods.

• Vacancy rates at U.S. malls have soared to 9.4%, the highest level since 2000, when real-estate researcher Reis began tracking such data.

We currently recommend four retailers for purchase, all capable of excelling even during a lackluster holiday season. Advance Auto Parts ($64; AAP) and AutoZone ($328; AZO) don't typically see a holiday sales bump, and Wal-Mart Stores ($57; WMT) is less economically sensitive than many rivals because of its focus on food and other staples. Bed Bath & Beyond ($61; BBBY) has managed solid growth over the last few years, while many rivals have not delivered.

DISCOUNTERS PACE RETAIL GROUP'S SALES GROWTH
Sales in stores open for at least one year rose 5.1% in September, based on an index of 23 retailers tracked by Thomson Reuters. The discount group has been consistently strong, with same-store-sales growth exceeding the overall index's growth in 15 consecutive quarters. Total retail sales rose in the first two weeks of October, helped by cooler weather and the launch of Apple's ($398; AAPL) iPhone 4S, according to ShopperTrak.
Same-Store-Sales Growth (%)
Retail Group
9/11
8/11
7/11
6/11
5/11
4/11
3/11
2/11
1/11
12/10
11/10
10/10
Discount
8.6
7.8
7.1
9.0
7.8
12.1
3.9
4.9
5.2
3.4
7.1
3.8
Department
3.7
1.8
3.4
5.7
3.8
9.0
(0.5)
5.3
2.0
4.7
6.6
0.2
Apparel
2.9
1.0
1.9
4.9
1.1
9.6
(0.9)
3.1
4.5
1.3
5.6
2.2
Teen/Child
6.2
6.3
6.8
6.5
4.5
12.6
3.3
4.0
(2.0)
1.8
9.0
0.1
Drug
2.5
2.5
2.5
3.9
1.3
2.5
2.0
2.4
4.5
2.1
(1.3)
(1.4)
Total
5.1
4.4
4.4
6.5
4.9
8.9
1.7
4.2
4.2
3.1
6.0
1.6

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