Retailers always sound optimistic over holiday prospects. But this year, there’s real basis for the sentiment.
Strong spring sales and second quarter reports, positive reads on back-to-school trends and the nation’s strong economic fundamentals like low unemployment and rising wages point to total holiday gains in the mid-single digits, with comparable sales gains a few points lower. Not to mention that better inventory controls and investments in Internet and omnichannel operations are paying off.
“Strategic initiatives are gaining traction,” said Jeff Gennette, Macy’s Inc. chairman and chief executive officer, after the company reported strong second-quarter earnings of $166 million, versus $111 million a year ago. “They contributed to our first-half results and will continue to have a positive impact on our performance in the back half of the year. This, combined with continued strong execution and a healthy consumer spending environment, gives us confidence to raise sales and earnings guidance for fiscal 2018,” to $3.95 to $4.15 per diluted share from previous guidance of $3.75 to $3.95.
“It’s the best retail environment we have seen since 2012. The spring season was terrific — you see it in the numbers, but you do have winners and losers,” observed Stephen Sadove, principal at Stephen Sadove and Associates and former Saks Fifth Avenue chairman and ceo. “Those adopting to the omnichannel environment and making a lot of cultural changes are doing well.”
While expecting a healthy second half, Sadove’s biggest concern is the possibility of consumer confidence declining over tariffs or something in the political environment, such as trade talks with China or tensions with Venezuela. “The consumer can always be fragile. They respond to these types of things.”
In addition, retailers will be up against strong comps from a year ago, though Sadove was less worried about that. “There will be good comps on top of good comps — a virtuous cycle. Momentum will carry retailers to another strong season.”
Service levels are likely to be affected by retailers’ inability to hire enough seasonal help due to the tight labor market. “The labor shortage is putting pressures on some retailers who have to raise some wages,” squeezing profits, Sadove said.
As Walter Loeb of Loeb Associates sees it, “The fourth quarter is going to be strong and very promotional, and a lot of values, planned earlier in the year, will be offered. There is going to be a more immediate need [for wear-now] merchandise being sold.”
Loeb also said the calendar is favorable this year, with 33 days from Thanksgiving Day to Christmas Day, versus 32 last year, and Christmas Day on a Tuesday this year, meaning there is a full weekend of shopping before the holiday for last-minute gifts.
Loeb believes retailers have more promotions planned and that Nov. 1 will mark the kickoff of the holiday, with retailers unleashing deals rather than waiting for Black Friday. With the early start, the season stretches out and deflates some of what has historically been the biggest days of the season, such as Black Friday. But Loeb said he didn’t think the promotional schedule will deflate Cyber Monday. “There is more emphasis on Internet purchases than ever before,” he said.
“It’s going to be a good Christmas season. Department stores are generally going to be pretty good and so will several specialty stores. Northface and Timberland will be very strong,” Loeb said, noting that coats and boots and wear-now goods generally should exceed the general trend.
Still, “There’s a lack of newness hovering over the whole retail industry,” particularly in electronics, Loeb said. Recently, electronics haven’t sold as well as fashion. “Luxury is going to be very much in demand this fall and winter, not only from domestic purchasers enriched by the stock market but also by foreign visitors. Tourism is a major factor for the sector,” said Loeb.
“The headline is, we’re as optimistic about the second half and holiday as we have been for years,” said Craig Johnson, president of Customer Growth Partners. “Year-to-date, there’s been solid growth, 5 or 5.1 percent. The last time we saw this growth was in the mid-2000s but a lot of it was built on a bubble — charging up credit cards, tapping into home equity. This year, it’s healthy spending coming out of healthy cash flow and based on true fundamentals of solid job growth and actual wage growth for the first time in a decade.”
Back-to-school sales gains could be above 5.1 percent and ahead of last year, Johnson said. “We believe the current momentum is going to sustain through the holiday, with the caveat that the performance of back-to-school is an imperfect predictor of holiday sales.”
Rising gas prices could be a negative factor in the second half, but appear to have peaked earlier in August and are heading down, Johnson said. He also said if trade talks with China escalate into a trade war, that could be an issue. “More likely, it’s a 2019 issue,” he said.
“Apparel is setting up for its best holiday in years,” continued Johnson. “People are spending on apparel again — it’s up 5 percent and triple the rate of the last five or six years. We believe it’s partly pent-up demand and partly a rotation in spending from other areas.” Up until recently, “People have been spending a ton in home improvement and consumer electronics and not much in apparel. Now we are seeing more balanced spending. People are refocusing their discretionary spending.”