Cautious Consumers May Make for Ho-Ho-Hum Holiday Sales
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By Jonathan Berr,
The Fiscal Times
November 15, 2013

Shares of Macy’s (NYSE: M) hit a record high Wednesday, jumping 9.4 percent after the department store giant posted better-than-expected quarterly earnings that prompted CEO Terry Lundgren to proclaim the company was “entering the fourth quarter with confidence.”

Unfortunately, Lundgren’s optimism isn’t widespread across the retail sector given the lingering uncertainties about the economy.

Those challenges were evident one day after Macy’s upbeat report, as Wal-Mart (NYSE: WMT), the largest retailer, posted its third straight quarterly decline in same-store sales and forecast a weaker then expected holiday season. U.S. same-store sales, or those at stores open at least a year, fell 0.3 percent, amid lackluster demand for toys and home electronics. Another chain, Kohl’s (NYSE: KSS), said it is ratcheting up marketing spending ahead of the holidays after reporting worse-than-expected earnings and cutting its outlook for the year.

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Indeed, the holiday season, where retailers earn most of their profits for the year, may turn into story of haves and have nots, as lower-income shoppers remain cautious. Holiday sales overall are expected to rise 3.9 percent to $602.1 billion, according to the National Retail Federation. That’s better than 2012’s 3.5 percent and higher than the 10-year average holiday sales growth of 3.3 percent. This year’s Thanksgiving to Christmas shopping season is also six days shorter than last year’s.

Yet consumer confidence, as measured by the Reuters/University of Michigan Consumer Sentiment Index, fell 1.2 points this month to 72, its lowest level in more than two years. Many consumers don’t seem to be feeling the holiday spirit. Perhaps that’s because median household income is below 2007 levels and many lower-income consumers are living paycheck to paycheck.

“We have been seeing the consumer be very cautious,” said Chris Christopher, an economist with IHS Global Insight. “It’s not like they are spending like they were in 2005, 2006. It won’t be that way anytime soon.”

Moody’s Economy.com economist Scott Hoyt, echoed that view. “We think we would be lucky to match last year’s growth,” he said, adding that wage income is growing at a tepid rate.  “That’s weighing both on consumer confidence and consumers’ ability to spend.”

One reason why the season may be jolly for at least some retailers is that gasoline prices remain relatively low. “The most fundamental thing that drives consumer confidence is gas prices,” said IHS’ Christopher. “It has an undue influence.”    

During the second quarter, Macy’s, Wal-Mart and Target (NYSE: TGT) were among the companies that reported disappointing results, creating what independent retail analyst Stacey Widlitz described as a “traffic panic” among investors who worried that consumer shopping visits and spending would slow. Widlitz added that “best of breed companies” such as L Brands (NYSE: LTD), parent of Victoria’s Secret, are doing fine.  The Columbus, Ohio company recently reported monthly sales that were better than Wall Street estimates. Discounter TJX (NYSE: TJX), parent of T.J. Maxx and Marshall’s, recently raised its earnings guidance.

“Macy’s didn't panic,” Widlitz wrote in an email. “They adjusted moderately. Didn't give away product. … Others may not fare so well.”

Retailers are certainly trying to do their part to get people in the mood to buy.   Kmart, which is part of Sears Holdings (NASDAQ: SHLD), plans to open at 6 a.m. Thanksgiving Day and not to close for 41 hours.  Privately held Toys `R’ Us will open its doors at 5 p.m. on turkey day, three hours earlier than last year. Wal-Mart, the largest retailer, plans to begin its Black Friday sales at 6 p.m., two hours earlier than last year. Chains such as Macy’s, Kohl’s and J.C. Penney (NYSE: JCP) plan to open their doors at 8 p.m.

Ever since retailers began opening on Thanksgiving, there has been a debate among experts whether it encourages consumers to spend more than they would have otherwise or simply lures them to make their purchases earlier in the holiday season. Hoyt, for one, doesn’t think the timing of these sales affects overall spending.

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Regardless, getting the word out about the Black Thursday deals won’t be cheap.

“We are concerned with promotional activity,” said Chris Terry, an analyst with Hodges Capital in Dallas, which manages $1 billion and follows the sector.  “We are concerned with inventory levels…. We expect it to be a choppy. It’s going to be hit or miss.”

The picture, though, isn’t entirely bleak. E-commerce sales are projected to continue to rise, benefitting companies such as Amazon.com (NASDAQ: AMZN). An annual holiday survey by consulting firm Deloitte found that, for the first time, Internet sites will be the top shopping destination.

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