Holiday price wars

Holiday should be good for U.S. retailers this year, but not great.

The S&P Global Ratings team of analysts from retail, restaurant, retail REITS and consumer goods believe that retail sales for general merchandise, apparel and accessories, furniture and other retail categories will increase between 2.1 percent to 2.5 percent year-over-year, according to a report issued Friday, titled “U.S. Retailers’ Wish for a Sales Increase Should Be Granted This Holiday Season.” The estimate is close to the post-financial crisis average of 2.3 percent from 2011 to 2015. While the report said there would be some gains, it also recognized that the increase still will be well below the long-term average of 3.7 percent. The S&P Global Ratings team also said the 2016 forecast is “consistent with our economic forecast for 2.9 percent fourth-quarter GDP growth and 2.7 percent growth in real consumer spending.”

The analysts said that retailers who performed below expectations last year entered the holiday season with disciplined inventory levels, which could help grant retailers’ wishes for accretive margins. The report also said: “Even with easier comparisons, we think this holiday season will highlight downside risk for subsectors of the retail world that are struggling to perfect their e-commerce model while navigating shifting consumer preferences and increasing price transparency.” Sales a year ago were up less than 1 percent.

Energy hasn’t really been a huge headwind for consumers and probably won’t be over the holiday season. The analysts concluded that lower gas prices didn’t translate into increased small ticket retail spending over the past year. What might help would be consumer willingness to borrow. The report noted that revolving credit card debt has risen recently.

The report said, “We also think there will be sufficient time for consumers to ponder the outcome of the U.S. presidential election before the holiday shopping spring.” The November-December shopping season is still believed to account for about 20 percent of annual retail sales. The analysts said the season “is usually an insightful annual case study into the currents shaping the sector. We expect margin pressure to be more pronounced in certain segments during the holiday season; specialty apparel, for example, has remained highly promotional.”

The analysts also noted that fourth-quarter same-store sales from 2006 to 2015 ranged from negative to 3.5 percent, and “We think discounters will continue to fare better than specialty apparel, with department stores somewhere in between.”

The S&P Global Ratings team said downside risk appears to exceed upside risk even more than last year. “Some rating or outlook changes could stem from the 2016 holiday season, given that our outlooks are negative on about 38 percent of the apparel, department stores, and discounters we rate, which was far more than last year (which was about 16 percent),” the report said.

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