What to Watch: Modest Gains for Holiday
With the nation’s jumble of macroeconomic forces and consumer dynamics, retailers are expected to pull off an OK holiday 2023 season — but certainly no barn-burner.
They’re confronting Americans pinched by inflation, as choosy as ever in their purchasing; trading down; spending more on travel, restaurants and other experiences and less on goods, and worried about how they will pay off student loans. For the most part, the savings built up by consumers by staying closer to home during the pandemic are being depleted and they’re borrowing more just as interest rates have risen.
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Yet consumers are continuing to shop at least certain stores and websites like Walmart, TJMaxx, Ross Stores, Abercrombie & Fitch, as well as Amazon, which is evidence that they are intent on shopping for bargains.
In other positive indicators for the holiday season, unemployment remains low at 3.5 percent, and the U.S. Census Bureau reported July retail and food service sales rose 3.2 percent from a year ago, as sales at apparel and accessories specialty stores increased 2.2 percent. In addition, preliminary August reads on back-to-school selling have been decent. But while many view the back-to-school season as a barometer for holiday, it’s not necessarily entirely reliable.
The bottom line: retailers should emerge from holiday 2023 with increases in the low-to-midsingle-digit range on average. Holiday margins will be buoyed by reduced costs associated with logistics and importing goods, and lower inventory levels more in line with sales trends, leading to less severe markdowns.
U.S. retail sales during 2022’s November to December holiday season grew 5.3 percent over 2021 to $936.3 billion, falling short of expectations.
“Christmas is really tough to predict, but it feels like the holiday season should be fairly steady in the mall — meaning not exceptional, but not bad,” observed William Taubman, president and chief operating officer of Taubman Centers.
“Luxury retailers should be up high single digits, while more moderate mall-based retailers should be up midsingle digits,” Taubman said. “It could be more promotional than last year, but shipping and other supply chain expenses have gone down, so even with more discounting, retailers should still come out with good margins. Rescinding forgiveness on student loans may come back to hurt retailers, but at least they are not up against COVID-19 stimulus payments, which ended in late spring 2022. I believe the mall will outperform the overall retail market as it has in the recent past.”
“Businesses have been positively surprised at how consumer demand has remained. We are expecting it to continue to remain strong for the holiday season,” said Ben Johnston, chief operating officer of Kapitus, a company that provides working capital, loans and factoring primarily to small businesses including retailers, restaurants, wholesalers and other sectors.
However, “there is a tremendous amount of uncertainty about the economy,” said Johnston. “We are in an unprecedented environment with the Federal Reserve consistently raising interest rates,” making it tougher for businesses, particularly smaller ones, to access capital for inventory and other needs.
“We’ve gone through a pretty significant tightening phase, which most people expected would materially slow the economy, and yet we just saw 2.4 percent of annual growth rate in the GDP for the second quarter. Interest rates rising really hasn’t raised the unemployment rate at all. That’s great for consumer spending,” Johnston said. “The Fed has been successful in bringing down inflation though not all the way down to the target of 2 percent. Eventually, this economy is going to cool off. But now the Fed has some ammo to try to make that cooling off a softer landing. They’re able to reduce rates and pump life back in the economy,” if needed. “As a result, I’m more optimistic about the economy in 2024, whereas back when interest rates were zero, [the Fed] really didn’t have many levers to pull if we went into a recession.”
Those retailers with lower inventories and some open-to-buy in reserve are better positioned to chase goods that are suddenly in demand to give a lift to selling. While inflation persists, the rate is declining after the Fed’s string of interest rate hikes. China’s slowdown can further reduce prices on goods, and the stock market has been holding up, though not yet back to pre-COVID-19 highs.
Salesforce, the software company for customer relationship management, sales, customer service, marketing automation, e-commerce and analytics, forecasts 4 percent global and 1 percent U.S. year-over-year online sales growth across November and December — reaching $1.19 trillion and $273 billion, respectively.
Salesforce expects a flurry of promotional events in early October from different retailers “leveraging the halo effect of Amazon’s fall Prime Day followed by aggressive discounts throughout Cyber Week,” which will account for 25 percent of all holiday digital sales. Salesforce develops its forecast through its Shopping Index, which analyzes data over the last nine quarters from more than 64 countries and 1.5 billion consumers on retail sites including 24 of the top 30 U.S. online retailers.
The pre-Black Friday promotions happening well before the actual day will pull business out of the traditional kickoff weekend for holiday shopping as well as Cyber Week, leading to a flattening of the sales pattern rather than sharp peak periods and lulls seen in past seasons.
Still, there’s always the last-minute rush for gifts in the week to 10 days before Christmas, which can tip the outcome either way. There are 32 days from Thanksgiving Day to Christmas Eve day this year, compared to 31 last year. Despite the foreseen and attractive early discounts, there’s also a segment of consumers that hold off for the best and final deals toward the end of the season.
Consistent with the Salesforce holiday forecast and others, Coresight Research, citing rising interest rates, a depletion of savings, a weaker housing market and resumed student loan repayments, projects low-single-digit total nominal retail sales growth in the final quarter of 2023.
In another sign that holiday business should be OK, Walmart raised its sales outlook for the year to a 4 to 4.5 percent gain, ahead of the roughly 3.5 percent gain seen previously. The earnings outlook was also upped to $6.36 to $6.46 per share, ahead of the $6.10 to $6.20 forecast in May.
But in a note of caution, John Furner, president and chief executive officer of Walmart U.S., said, “There are reasons to be optimistic in areas like employment and the wage inflation that’s happened. And there are other reasons to be concerned — consumer balance sheets potentially weaken over time…There are a lot of conflicting data points.”
July sales results were encouraging to the industry. The National Retail Federation cited wage increases giving consumers more money to spend and Prime Day and other major promotions for the uptick. “July retail sales show consumers continue to drive the economy through this period of economic pressure with robust spending supported by steady job growth and wage gains,” NRF president and CEO Matthew Shay said in a recent statement. He said the NRF expects a “record back-to-class shopping season.”
NRF chief economist Jack Kleinhenz said, “The data shows the ongoing resilience in consumer spending and how it is fueling the overall economy. It’s worth noting that the strong year-over-year gain came partly because sales accelerated this July but were decelerating at the same time last year.”
Rob Garf, vice president and general manager at Salesforce, said in a statement, “After a few years of accelerated e-commerce adoption throughout the pandemic, retailers are under pressure to drive sustainable growth and customer loyalty — while maintaining margins. Despite a slowdown in online spending, brands that activate customer data and insights to execute effective promotions, relevant engagements powered by AI, and seamless experiences across channels will keep shoppers coming back over the holidays.”
A major fashion and accessories supplier to national chains, who requested anonymity, said, “The stores are playing it a little bit conservative with ordering inventory for holiday which is pretty much placed by the end of August, but they can still chase into September…I’m optimistic for holiday based on what I’ve seen in the last six weeks. Back-to-school business has been really good. Retailers are saying that newness is selling, but not everything is selling. Consumers are still selective.
“There is a sense that definitely the shoe is going to drop because of the high interest rates, savings being depleted, and inflation,” the suppler added.
Another major vendor, also wishing to remain unnamed, noted that holiday buying budgets among full-price retailers are flat, and that off-pricers are holding back on open-to-buy dollars waiting closer to season to purchase.
Last July, Nfinite, a virtual photography platform with 3D and CGI technology that enables brands and retailers to build and display product visuals, conducted an online survey of 1,146 U.S. adult consumers about holiday shopping. Among the key findings:
30 percent said they would spend less this year.
33 percent intend to purchase fewer holiday-themed or seasonal products compared to last year.
46 percent said there would be no change in how much they spend.
24 percent said they would spend more this year during the holiday season than last year.
50 percent of consumers will start their holiday shopping earlier this year compared to last year.
66 percent of consumers actively seek out discounts.
Research firm Prosper Insights & Analytics reported that based on its monthly survey of more than 7,500 U.S. consumers, confidence dropped slightly from July to August this year, but is above August 2022. “Consumers are coping with the price increase spikes by shopping for sales more often, switching to store brands/generic products and using coupons more. These shopping behaviors are more apparent with customers of Walmart and Target,” Prosper reported.
Consistent with Nfinite’s findings, Prosper reported that more consumers are planning to spend less than planning to spend more as the year progresses. They’ll be taking fewer trips to the mall due to fluctuating gas prices, which have gone up lately.
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