Why Holiday Sales May Be Surprisingly Strong This Year

Contributor

Paula Rosenblum

One thing we can say about Americans, we love to shop.  Okay, so the government shut down for a while, we dealt with it; worry us not about the ACA website disaster: if the sun is shining and those store windows are gleaming, we’re in.  Maybe we’ll go cheaper, but we’re going to shop anyway.  How else to explain retail sales beating forecasts for October?   No doubt falling gas prices helped the cause. I can’t remember the last time I saw regular gas selling for $3.29 a gallon.  Apparently the average ticket for regular gas is now down to $3.11 around the country. But still, whatever the reason and defying the odds, Americans spend.

According to the National Retail Federation (NRF), the world’s largest retail trade organization, October retail sales increased 2.5% over September (excluding automobiles, gas stations and restaurants).  Even more surprisingly from my point of view, sales increased 4.2% “unadjusted” from 2012.  That “new normal” we predicted after the Great Recession has flown away.  When the chips are down, it’s time to go shopping.  Overall, that’s good news for retailers and bodes well for the holiday season.  How well does it bode?  The NRF is predicting a top-line increase of 3.9% over holiday 2012.

Port traffic, which is often used as a proxy for retailers’ expected revenue (that’s where most of the merchandise to be sold comes from) has been high.  To quote from August’s Global Port Tracker for North America, written by Hackett Associates in partnership with the National Retail Federation:

“Trade at the ports continues to remain positive, confirming our view that the economy remains on a slow but steady course of recovery. The first half of 2013 versus the same period of last year indicates a six percent increase in volumes on the all-important west coast. A small cause for concern remains the inventory to sales index which refuses to budge from its relatively high level in the 128 to 130 range. The question is: are importers building up stock ahead of expected sales demand or in response to announced freight rate increases.”

In other words, the good news is the economy continues to improve.  The bad news is that inventories are increasing faster than expected sales.  And that can translate into late season markdowns if sales really don’t materialize. This is always a concern for me.  Let’s be clear – the Black Friday promotions have been planned for months and generally factored into expected gross margins.  It’s the panicky “Take 70% off everything in the store” markdowns that often pop up in mid-December that signal retailer sales shortfalls.  Those are desperation moves.

All eyes are now on “Black Friday” weekend.  To give you an idea just how many eyes are on us, I received an interview request from Russian TV station Channel 24 to discuss what’s going to happen that weekend.  The Russians have no analog to the holiday, they’re just curious to see what the heck we Yankees are going to do.  They’re particularly interested in understanding if releasing holiday prices in advance will hurt sales, given the loss of the element of surprise.  My answer? Of course not.  Apparently, waiting in line or sitting with one’s tablet has replaced watching football as the great American Thanksgiving pastime.  Like it or not, shopping anytime, anywhere is what we love.  And no one wants to pass up a great deal.

With that as a backdrop, I’m going to go out on a limb here and make a few predictions:

Best Buy BBY +0.93%’s top line is going to come roaring back.  This is, however, a short term win. The company issued a gross margin warning because it’s determined to win back customers from Walmart, Amazon.com AMZN +1.81% and others.  Competing on price is not a sound long-term strategy, but it’s a reasonable short-term tactic in this case.  Consumers have to be lured back to Best Buy’s stores.  And in a game that Best Buy itself determined is price based, Best Buy has no choice.  But long term, Best Buy knows the game will be won on staying close on price but hitting a customer service home run. We can recall former arch rival Circuit City pounded on prices in 2006, and was gone from the landscape by 2009.  We expect Best Buy to make smarter moves.

Walmart will make a lot of noise, but sales will remain flat.  There will be a thousand reasons put forth to explain dampened performance, and the company will get very aggressive in pricing investments (translation:  bargains!).  But those very investments will serve to reduce dollar volume and average transaction size. Dollar stores, on-line retailers and even JC Penney JCP -2.86% will take a bite out of Walmart’s share of wallet.

Amazon.com is going to continue its wild sales trajectory.  There’s no stopping this company.  It seems to think of itself as something like a grocery store in many ways.  Grocery stores make very little money on each item they sell…but they sell a lot of them and turn over their stock frequently. Same with Amazon: there’s an expectation of low profit margins but very high sales volume.  And no matter how you slice it, it’s still America’s favorite retailer. So it will continue nibbling at the edges of every other retailer’s business.  When was the last time you couldn’t find any product on Amazon?

Macy’s will knock the cover off the ball. Sometimes you’ve just got to give a tip of the hat to a company’s CEO.  For every brickbat thrown at Ron Johnson for his short, awful tenure at JC Penney, there should be an equal number of roses tossed at the feet of Terry Lundgren, CEO of Macy’s.  His grasp of the Millennial generation, ability to visualize the implications of smart devices as shopping devices (what retailers call “omni-channel retailing”), and the gradual way he has re-invented the company are really somewhat astounding.  I’m not prone to wax poetic about CEOs, but Lundgren has earned every penny he’s been paid.

Nordstrom JWN +0.62% will continue to be a customer darling.  Nordstrom’s customers are quite happy the company isn’t open on Thanksgiving.  Prices are close enough, and service is always superb.  Plus the company has developed excellent synergies across all the digital and physical places it touches customers.  It’s a well-oiled machine for a positive customer experience.

Those are my first thoughts on the holiday season.  Expect more as the season progresses.