Black Friday, that decidedly American pastime of retail hedonism that looks more than a little like a zombie apocalypse, has come and gone — and the early results aren’t particularly pretty for traditional retailers.
Sales at brick-and-mortar stores on Thursday and Friday totaled a projected $12.1 billion — down from last year, according to early estimates from retail research firm ShopperTrak, which nevertheless still forecasts a 2.4 percent increase in sales at traditional stores this season. That doesn’t mean shoppers held back — about 103 million of them were busy buying online, more than the roughly 102 million who visited stores, according to a survey conducted for the National Retail Federation.
A strong holiday showing is critical: According to LPL Research, seasonal sales have had roughly a 92 percent correlation with fourth-quarter GDP growth over the last 10 years. Consumer spending is still responsible for more than two-thirds of the U.S. economy. And seasonal employment is set to add upwards of 750,000 jobs to the economy in the months to come.
The good news: Despite some mixed earnings and guidance from the retail sector, overall sales should be strong. Because despite some shaky measures of consumer confidence lately — the Paris terror attacks may be dampening holiday spirits — there are a few very good reasons for wallets to be joyfully opened in the weeks to come.
I’ll lay out those reasons in a moment, but first let’s look at the retail landscape and see why some retailers really need Santa Claus to be generous this year.
Stocks of large retailers Macy's (M) and Nordstrom (JWN) have been hit hard recently on outlook cuts and bloated inventories. Target (TGT) weakened after reporting inline third quarter results on margin pressure. Dick's Sporting Goods (DKS) saw shares gap lower after a Q3 earnings per share miss driven by weaker-than-expected comparable-store sales and disappointing guidance on earnings in the fourth quarter and full year.
Best Buy (BBY) was hit despite beating estimates for Q3 earnings per share. Investors were disappointed by domestic comp-store sales growth of 0.8 percent (below the 1.2 percent expected) as there just isn't a "gotta have it now" product or category in the electronics space this year.
Yet other retailers have been looking better.
Shares of Abercrombie & Fitch (ANF) have surged after better-than-expected earnings and revenue on strong comp-store sales growth. Gap (GPS) is back over its 50-day moving average on in-line Q3 results. Ross Stores (ROST) is back to August levels on solid earnings, profit margins and comp-store sales growth.
Home Depot (HD) is the single most overbought stock in the Dow Jones Industrial Average, according to the Bespoke Investment Group. It has risen after a Q3 earnings beat driven by a 5.1 percent increase in comp-store sales. And Wal-Mart (WMT) gained after reporting earnings that were slightly better than expected, helped by a 1.5 percent increase in comp-store sales, in-line with estimates. Store traffic increased 1.7 percent.
For now, the S&P Retail Index SPDR (XRT) is in a confirmed downtrend — with the 50-day moving average below the 200-day moving average and sloping lower — as investors remain skeptical overall.
Income and spending data released last Wednesday support that skepticism. The Atlanta Fed's GDPNow real-time forecast model is now estimating Q4 GDP growth of 1.8 percent, down from 2.3 percent previously. The drop is being driven by a decline in expected real consumer spending growth from 3.1 percent to 2.2 percent based on personal income and outlays data released last week.
This casts a pall over the holiday shopping season just as it's starting, although to be fair, the GDPNow model tends to be overly pessimistic and has a record of predicting lower-than-actual growth.
So why be optimistic about holiday sales? First, because of approaching seasonal weakness, consumers are likely to receive a boost to confidence from even lower gasoline prices. AAA puts the price of a gallon of gas at a national average of $2.06. Drivers enjoyed the cheapest Thanksgiving fill-ups since 2008. According to Bespoke, prices could be headed even lower.
Since 2005, gas prices have tended to keep declining through the middle of December. So while prices this year, as shown above, are much weaker than average, the seasonal pattern is holding. On average, prices have dropped 3.3 percent between Thanksgiving and mid-December. That's enough to take prices right to the $2.00-a-gallon threshold.
Heading into the peak retail season, we could soon see gas stations lofting "$1.xx" price signage. If that doesn't instill confidence in consumers, nothing will.
Another factor has been the persistence of the energy price decline. According to Bespoke, the year-over-year gasoline price has been negative for 502 calendar days, far in excess of the 368-day streak during the financial crisis in 2008 and 2009. That should give an air of permanency to the energy cost windfall consumers are enjoying.
And finally, while interest rates remain historically low, Yardeni Research shows that wage inflation is starting to materialize out of a tightening job market. The chart above shows how average hourly earnings in private industry have increased to post-recession highs, breaking out of a long sideways crawl going back to 2012.
So we have a combination of still-low interest rates, falling gas prices and higher take-home pay. Sounds like a recipe for retail success to me.