Morgan Stanley delivered a sooty lump of coal to apparel retailers on Thursday, via a grim forecast for the current holiday season. Softlines sales are expected to ring up a meager 1.6 percent same-store sales gain in the fourth quarter, the worst performance since 2008. That figure is 190 basis points below last year’s 3.5 percent increase and 220 basis points below the four-year average from 2009 to 2012.

This story first appeared in the November 1, 2013 issue of WWD. Subscribe Today.

The estimate was the most pessimistic of the major holiday forecasts from organizations like the National Retail Federation and ShopperTrak, which published earlier estimates of sales increases of 3.9 percent and 2.4 percent, respectively, for the season. Each study analyzed a different universe of retail channels and companies.

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In another dim projection, Customer Growth Partners, of New Canaan, Conn., forecast 2.9 percent growth in holiday spending, the slowest pace since the recession. Apparel sales are predicted to lag the overall trend and increase just 2.6 percent in that study, down from a 4.2 percent expansion last year. E-commerce revenues are included in those figures.

The Morgan Stanley report — from analysts Kimberly Greenberger, Scott Devitt and Jay Sole, along with economist Ellen Zentner — encompasses specialty retailers and department stores in its calculations. It excludes J.C. Penney, due to its dismal 31.7 percent comp decline last year during its ill-fated attempts at a makeover.

Unlike last year, J.C. Penney is expected to be aggressively promotional this holiday in order to boost its top line, forcing other retailers to follow suit, with a potential negative impact on margins. “We predict JCP will offer extremely deep discounts early in the season to ensure it achieves its positive comp guidance, putting pressure on other retailers to do the same,” wrote the Morgan Stanley analysts. “With JCP’s equity offering in late September, the company essentially promised investors a positive fourth-quarter comp.”

Among the projected winners in this landscape are Internet giant Amazon, luxury brand Michael Kors, off-price retailer Ross Stores Inc., Victoria’s Secret owner L Brands Inc. and digital coupon marketplace RetailMeNot.

“We expect Kors to deliver the single best sales growth in retail this holiday in the specialty store sector, as women continue to shift some of their apparel budget to accessories. In this environment, Michael Kors appears best positioned within the category and far less prone to discounting,” wrote the analysts.

There are six fewer shopping days between Thanksgiving and Christmas this year, which could lead retailers to bank on early and heavy discounting to drive sales. Store checks by Morgan Stanley show softlines retailers have been about 20 percent more promotional in the third quarter compared with a year ago — and promotions will deepen in November and December.

The report forecast flat or rising gross margins at only five companies: Ann Inc., Express, The Children’s Place, Michael Kors and Urban Outfitters Inc.

Off-price retailers, such as Ross Stores, are projected to continue taking market share from midtier department stores. “Consumers increasingly prefer the off-price better-brands-at-lower-prices value proposition over midtier department stores’ better shopping experience, especially when gift giving,” wrote the analysts.

In department stores, the center-core categories of handbags, shoes, accessories and cosmetics are driving sales. Stores with well-executed center-core strategies, such as Macy’s Inc. and Nordstrom Inc., are expected to outperform Kohl’s Corp. and J.C. Penney Co. Inc.

Among young adults, Morgan Stanley sees shopping behaviors favoring fast-fashion chains like Forever 21, H&M and Zara at the expense of traditional teen retailers such as American Eagle Outfitters, Abercrombie & Fitch and Aéropostale.

Apparel retailers have been negatively impacted by the shift in consumer spending toward durables like autos, home improvement and appliances, a trend Morgan Stanley sees continuing into 2014. Auto sales are on pace to increase 11 percent this year, for example.

Customer Growth Partners sees promotional activity negatively impacting apparel retailers, predicting a more than 5 percent decline in operating income per square foot. “For retailers, particularly those dependent on healthy discretionary spending, this will be the most challenging holiday since the recession, and more so for those who placed their holiday orders earlier in the year, when sales were healthy,” said Craig Johnson, president of CPG.

He attributed much of the softness to the weakness of the employment picture. “Households with full-time jobs spend against both needs and wants, but consumers with part-time jobs spend only against needs,” he said. Real disposable income, he added, has risen less than 1 percent in recent months, less than one-fifth the rate it did during the years prior to the recession.

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