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Holiday Shopping Sales Outlook: Will Hurricane Sandy Steal Retailers’ Christmas?

Dec. 14, 2012
Investing, Investments
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If you’re looking for Christmas cheer at the mall this year, it’s more likely to be found in the décor than in the sales this December.

As we head into December holiday sales and the shopping season continues to heat up, what are the early projections telling us about what to expect through the end of year?

November Sales Marred by Hurricane and Low Consumer Spending

Early reports of a strong Black Friday (and Cyber Monday) were heartening particularly when it comes to ecommerce, but they are not necessarily indicative of an overall strong holiday retail season.  Black Friday is, after all, only one day out of the entire month of November, and many U.S. retailers were counting on a stronger November overall than they got.

The overall economy has been growing – albeit tepidly. Even that sluggish growth has been enough to fuel more than 18 percent growth in the S&P 500 over the trailing 12 months. But that’s cold comfort to retailers of all shapes and sizes, who are seeing a hurricane worthy of the Grinch himself sapping their November sales of Christmas cheer:

  • Nordstrom same-store sales fell 1.1 percent in November compared to the year ago period.
  • Tiffany & Co. reported that their profits fell 30 percent in the last quarter.
  • Macy’s took a 0.7 percent hit.
  • Kohl’s was punished with a 5.6 percent haircut over the prior year.
  • Wet Seal, representing the teen market, was down over 5 percent as well.
  • Even the downscale mass-market retailer Target was hurting.

One major reason is that Hurricane Sandy did a number on stores with significant presence in the Northeast, causing some retailers to actually post lower November numbers than they did a year ago. Overall, while analysts had been projecting a respectable 3.3 percent sales growth over the year-ago period, what we actually saw was closer to 1.6 percent, according to Thompson Reuters.

Holiday Retail Outlook: Will the Grinch Who Stole Thanksgiving Also Steal Christmas?

Christmas is like the Superbowl for retailers. It’s like St. Patrick’s Day for Irish pub owners, except that there’s a whole month of it, and it’s not as bad for your liver.  For many retailers, Christmas sales account for some 40 percent of revenues; they have got to perform strongly heading into Christmas because their entire business model relies on it.

But so far, the mall rats aren’t delivering.  Is there anything to indicate this pattern will change by the Christmas and New Years holiday?

Even though Sandy is now over, it still hurts to have many of the highest-volume stores in the greater NYC area take a beating because of the 2nd once-in-a-century storm in the last five years. Even if the store locations weren’t directly affected, many of their customers were – and it’s tough to put your mind on Christmas shopping when you’re still trying to clear out devastating flood damage from your home. It’s also tough to do a lot of spending when you were uninsured for flood damage, or the flood knocked out the business where you work – costing you your job, at least for a while.

There were bright spots, yes. Black Friday sales were strong, as were Cyber Monday’s online sales – but only for those willing to grant steep discounts. They got people in the door, but profits were still thin.  Craig Johnson, a partner at Consumer Growth Partners, told the New York Times via email, “The traditional week-after-Black-Friday lull started on… Black Friday.”  Shoppers went home, says Johnson, as soon as early-bird specials expired at mid-day.

Retail Stocks and Markets: Projecting The Year Ahead

Despite a rocky holiday season, don’t worry too much about 2013 – yet.  Looking ahead, the analysts at Fitch Ratings anticipate continued growth in the retail space in 2013.

Specifically, Fitch is looking at growth in the 2-3% range.  While this is significantly slower than the 5.6 percent growth for the sector as a whole posted for 2011’s Christmas season, retail sales should still grow, in the aggregate. Unfortunately, you don’t buy stocks in the aggregate – you buy them one at a time. Even indexers are stuck with that model; Fitch still expects overall sales to increase through 2013, but any given retailer is going to be locked in a death struggle for market share. Competition will likely put a lid on top line growth for established retailers.

So what does that mean? The retail play for 2013 may not be the big names that stand to lose market share. If the economy continues to slowly grow, and if the effects of Sandy are temporary (a safe bet), then the beneficiaries of that environment will be the upstart retailers: the new issues, microcaps and small caps who benefit from both modest growth as well as increases in market share, stolen from the big guys. When overall growth is sluggish, the growth that will happen will be for companies that are successful in stealing market share from someone else.

Savvy Investor Stock Picks: Who Can Win Over Consumers?

Recommendation: look for small and micro-cap retailers, ideally with significant insider buy in recent months.

One example: Build-a-Bear Workshops (NYSE-BBW), with a market cap of around $60 billion, now trading at around $3.62 per share. One of their insiders bought up 50,000 shares for $234,450 earlier this year. That translates to a price per share of $4.68 for the insider; new investors are buying it up at a significant discount. Meanwhile, Build-a-Bear Workshops is adding new outlets regularly.

Net insider transactions went strongly long earlier this year, but the stock is trading near all-time lows.  There are no earnings yet, so no P/E is available. We’re keeping a close eye on same store sales and the number of new outlets going up, as well as the movement of individual established stores towards profitability.

Be Cautious in 2013: The Looming Fiscal Cliff

My own outlook: Somewhat more cautious than even Fitch’s. I’m not looking for a bust. But there are some elements of the fiscal cliff that will hit mall-type retailers where they live – discretionary household budgets.

Specifically, the child tax credit will fall from $1000 to $500, unless Congress intervenes. More significantly, it will become nonrefundable. That means a thousand dollars per child that comes right out of the shopping budgets of working class families, who used to get a nice tax refund to buy kids’ clothes with, even if they had little or no income tax liability. Though retailers won’t feel the brunt of that until the 2014 tax refunds go out, this will hurt children’s retailers most. It will be the age of hand-me-downs.

What’s more, the payroll tax holiday expires if we go over the fiscal cliff. Employees will have 6.2 percent of pay withheld from their paychecks, instead of just 4.2 percent. That’s another 2 percent decline in spending power for consumers right off the top, and it’s effective almost immediately. And when you apply that 2 percent specifically to discretionary spending, it’s a lot more than 2 percent.

On top of that, if Congress doesn’t act to prevent the fiscal cliff from occurring, the CBO is anticipating a rise in unemployment to just over 9 percent over the course of 2013, as the economy contracts by 0.5 percent.

Congress may rescue the child tax credit, but they are unlikely to rescue the payroll tax holiday. And while I do expect Congress to make some sort of deal, fiscal policy in future years must be much less profligate than it was over the last 20 years. Several parts of the fiscal cliff must come to fruition; economic and fiscal realities demand nothing less, and the Fed cannot run the printing presses forever.


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