I have been weighing the good and the bad for the rest of this year. After much thought, and some sleepless nights, I have concluded that for most retailers Holiday 2013 will be a very tough season.
Let’s look at the negatives that are affecting retail sales:
Negative #1: There is some involuntary inventory accumulation after the recent second quarter reports – sales for most retailers were below expectation. This is exacerbated by the fact that most retailers have lowered their sales plans for the rest of the year. While higher inventories and lower sales plans have cut the open-to-buy for most retailers, it does not stop the arrival of the merchandise that is already on ships from the Far East. In many cases it represents the bulk of the fall and winter orders. The merchandise that is already on the shelves is not getting any better, or more attractive to customers, and will have to be marked down – and, because of the buildup, new arrivals will also face potential markdowns in order to attract buyers. I think the accumulation of merchandise will lead to additional sale events.
Negative #2: The junior business, which usually is very vibrant and profitable, seems to be a disaster right now for department stores and specialty retailers alike. Many companies are reporting double digit decreases. While some retailers, at recent meetings, beat their breast and exclaimed “mea culpa, we did not buy the right merchandise young people want” – I think that many millennium customers have cut their spending in apparel and are spending more on technology such as smart phones and tablets.
Negative #3: The Jewish holiday Chanukah, which is a big gifting period for 8 days – as the family lights an additional candle every night to commemorate the rededication of the Second Temple in Jerusalem at the time of the Maccabeans Revolt against the Greeks of the 2nd century BCE. The holiday starts this year the day before Thanksgiving since it occurs on the 25th day of Kislev according to the Hebrew calendar, which may occur at any time from late November to late December in the Gregorian calendar. This year it is at least 3 weeks earlier than usual and will have many Jewish families shopping on and before Thanksgiving for gifts. This may shift some buying momentum. (I am told that the next time this will happens is in 2083).
Negative #4: There are six fewer selling days between Thanksgiving and Christmas this year compared to last year. This happens every six or seven years and proves, each time it happens, to create a difficult selling period. Retailers will do promotional events early – maybe even around November 11. It will not work – customers are cleaning their houses and preparing their turkeys; they are in no mood to shop for Christmas gifts.
Negative #5: There are thirteen weeks in the 2013 fiscal calendar compared to fourteen weeks last year. While in past years this proved to be an unprofitable week, in most recent years the tight inventory and sales controls made this a profitable period that retailers have to recon with.
Negative #6: Consumers are spending money on big ticket items such as autos which have shown strong growth. A number of retailers have mentioned this as a reason for disappointing sales in recent months. Auto financing is attractive and easier to get than it has been in some time, and consumers are stepping up to the new technologies now available in new cars. When compared to the wears sold in departments stores, cars are more exciting right now. This is a major change in discretionary spending.
Unfortunately I have only one positive for this year:
Positive #1: Storm Sandy, which destroyed many properties on the Eastern Seaboard occurred November 1, 2012 and had strong effect on retailers for most of November. The weak sales of 2012 will provide easy comparisons and help overcome some sales deficiencies in 2013.
Retailers are well aware of the issues they face this Holiday season and have already lowered their sales expectations. It is likely that they are planning to meet the challenge of beating last year’s sales by lining up a series of strong promotions for Black Friday and Cyber Monday and the selling period that follows. Strong promotions generally are planned in the spring for this selling period – possibly as late as June – and are generally planned with good profit margins. Many times suppliers have factories with extra capacity that can benefit from the extra planned promotional volume – even though the pricing might have squeezed profit margins somewhat. However, unplanned inventory accumulation, which is happening now, may cause unplanned markdowns that will eat into planned gross margins.
Another key consideration for leading retailers is whether they should open at midnight or 5 am or 4 am on Black Friday – last year J.C.Penney’s ill-fated management chose not to open in the wee hours of the morning. I bet most retailers will open at midnight, do good business until 3 am, reset the store for the onslaught at 5 or 6 am and then have very strong sales Friday, Saturday and Sunday. (Usually Friday night is weak – because everybody is tired.)
As a result of these factors I believe that most retailers will promote and hope that strong sales will create leverage on selling costs and other factors to boost overall profits. They will report their fourth quarter results two ways – 13 weeks vs. 13 weeks and will show reasonable profits, but will have a tough time to show positive GAAP results when comparing sales and earnings against the 14 week period of last year.
On a comparable basis I believe that most department stores Nordstrom, Macy’s, J.C.Penney, and Kohl’s. Dillard’s DDS +1.33%, Belk’s and Bon Ton will show modest increases in comparable store sales. I believe that the weak performance of J.C.Penney last year suggests that they will have good store sales increase of 10 to 15 percent while Macy’s could be around 3% and Nordstrom around 5%. Kohl’s is likely to have flattish sales. Walmart and may report an increase of around 1% while Target TGT +1.71% Stores will benefit from their Canadian expansion. The promotional environment will hurt specialty stores like The Gap, Urban Outfitters, Aeropostale and American Eagle.
While I think consumers will shop late, as they seem to do every year, most will open their pocketbooks to buy family gifts. Despite this, it is likely to be a tough Holiday season…batten down the hatches!